By Don Alexander, MBA
Associate, RSD Solutions Inc.
Mr. Alexander also lectures at NYU and SunySB
Global growth is projected to increase moderately during 2013, as the factors underlying soft global activity are expected to subside. Policy actions have temporarily reduced crisis risks in the euro area and the United States. But in the euro area, the return to recovery after a protracted contraction is delayed. While Japan has slid into recession, stimulus is expected to boost growth in the near term. At the same time, policies have supported a modest growth pickup in some emerging market economies, although others struggle with weak external demand and potential bottlenecks. If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected. However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks.
Economic conditions improved modestly in the last half of 2012 with global growth increasing to 3 percent. The main sources of acceleration were emerging market economies and the United States, where growth surprised on the upside. Financial conditions stabilized. Bond spreads in the euro area periphery declined, while prices for many risky assets, notably equities, rose globally. Capital flows to emerging markets remained strong. However, a broad set of indicators suggests that global growth upside not strengthen further near-term.
Growth in the United States is forecast to average 2 percent in 2013, rising above trend in the second half of the year. In particular, a supportive financial market environment and the turnaround in the housing market have helped to improve household balance sheets and should underpin firmer consumption growth in 2013, but fiscal policy outlook is uncertain.
The near-term outlook for the euro area has been revised downward, with activity now expected to contract by 0.2 percent in 2013. This reflects delays in the transmission of lower sovereign spreads and improved bank liquidity to private sector borrowing conditions, and still-high uncertainty about the ultimate resolution of the crisis despite recent progress. However, euro-area prospects remain a global risk until long-term structural issues such as banking union and fiscal consolidation are addressed.
The near-term growth outlook for Japan has not been downgraded despite renewed recession concerns, but is expected to be short-lived because the effects of temporary factors. A sizeable fiscal stimulus package and further monetary easing will give growth at least a near-term boost, with support from a pickup in external demand and a weaker yen. There will need to be further reforms on fiscal policy.
Growth in emerging market and developing economies is on track to build to 5.5 percent in 2013. Nevertheless, growth is not projected to rebound to the high rates recorded in 2010–11. Supportive policies have underpinned much of the recent acceleration in activity in many economies. But weakness in advanced economies will weigh on external demand, as well as on the terms of trade of commodity exporters, given the assumption of lower commodity prices.
The policy requirements outlined in 2012 remain relevant. Most advanced economies face two challenges. First, they need steady and sustained fiscal consolidation. Second, financial sector reform must continue to decrease risks in the financial system. n China, ensuring sustained rapid growth requires continued progress with market-oriented structural reforms and rebalancing of the economy toward private consumption. In other emerging market and developing economies, requirements differ. The general challenge is to rebuild macroeconomic policy toward a more favorable growth environment.
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