The global economy is set to benefit from the US and Europe picking up speed in late 2013 and during 2014, according to a new report published by Danske Bank.
In its latest global report, The Big Picture, the bank says the euro area recession has ended and forecasts global growth of 2.9 per cent in 2013 and 3.9 per cent in 2014.
After two and a half years of very subdued growth in the Western world, a gradual recovery in developed economies is now emerging and is expected to gather pace in 2014 and 2015.
“When it comes to the global economy, developed economies are seeing a good recovery,” said Danske chief economist Angela McGowan.
“The US is performing really well and the euro area has largely managed to put the debt crisis behind it and slowly move out of recession.
“The risk to global growth has now shifted from the Euro area to emerging market turmoil. Although emerging markets are currently lagging, they are expected to benefit from rising exports to the developed world and recover in 2014”.
The biggest change to Danske Bank’s global forecast is a revision of their Euro area outlook.
After six quarters of contraction, it said the recession in the Euro area had ended as the economy grew by 0.3 per cent in Quarter 2.
“Uncertainty has been reduced considerably after the ECB tamed the euro crisis with the famous ‘whatever it takes’ comment.
“As confidence rises for households and the corporate sector, money is likely to be spent and invested, therefore pushing up economic growth. Fiscal policy tightening in the US and Europe is at its peak this year and the effects will start to ease in coming quarters creating room for economies to grow faster.
“Low inflation will also support growth as the cost of living is only rising very slowly and leaves scope for central banks to keep interest rates extremely low for a very long time.”
The report notes that the US economy recovery is on track and a combination of fading headwinds and pent-up demand should secure a sustained period of growth above trend. The US housing market has turned a corner, with prices now rising at the fastest pace since 2006. Despite the pick-up in house prices, affordability remains high by historical standards. The housing market recovery has helped to underpin consumer sentiment and US households are now the most optimistic in more than five years. Danske Bank forecasts suggest that the USA should grow at around 1.6 per cent this year and 3 per cent next year.
Ms McGowan noted: “When it comes to the world’s largest economy, it is worth noting that the negative shock from the financial crisis has, by and large, been absorbed by now. Consumer debt levels are down significantly and in the banking sector balance-sheet repairs have come far.”
Stronger than expected growth in the Euro area is the result of a number of factors. Improvement has been driven by stable exports, positive market sentiment and rising confidence for consumers and companies. In particular, the amount of pent-up demand in business investment is considerable. European enterprises have saved and held back on investments for almost five years and the return in confidence should imply that postponed investments will be initiated in the coming quarters.
Commenting on the Euro area, Ms McGowan added:
“Despite the general improvement, growth in the euro area remains uneven with Germany and France expanding and Italy and Spain contracting. However the slowdown in the periphery countries is becoming less severe and things are generally moving in the right direction”.
Emerging Markets and Asia
During the crisis, capital flew to emerging markets both in terms of direct investment and portfolio investments. However, this summer money started to flow out of these markets at an accelerated pace as investors began to leave countries with big current account deficits. The improvement in the US economy and suggestion that the US Federal Reserve will begin to unwind its quantitative easing programme have tempted many investors back to the US.
However Danske Bank believes that the developed market recovery will soon give support to Emerging Economies. The report notes that the Chinese economy appears to be stabilising but will remain subdued. Overall growth in China is forecast at 7.4 per cent this year and 7.7 per cent next year. In Japan the recovery is expected to continue this year with overall growth of 1.7 per cent, although it will slow to around 1.3 per cent in 2014 in the wake of substantial fiscal tightening.