Prospects for the global economy: NIESR's February 2013 forecast

Global Economic Forecast

• World growth remains below trend at 3.3 per cent in 2013 and 3.7 per cent in 2013, little changed from our previous forecast.
• World trade will only grow slightly faster, and again below trend.
• The Euro Area will grow only slightly next year, while Japan is forecast to grow by 1.4 per cent, the US by 2.4 per cent, and China by 7.3 per cent.
• Interest rates will remain extremely low by historical standards, and inflationary pressures will remain subdued.

More than five years after the financial crisis, the world economy remains weak, with very high unemployment in advanced economies and continued below trend growth overall. However, for the moment at least, there are some signs of improvement, although significant downside risks remain.

Tensions on global financial markets, most notably those in Europe, have eased in recent months. A firm policy commitment to maintain the integrity of the Euro Area has allayed fears of a disorderly break-up, bringing yields on the most vulnerable sovereign bonds down. This in turn has softened the risk of an imminent and widespread banking crisis. Outside Europe, policymakers in the US reached a last-minute fiscal agreement to avoid the most severe tightening measures that would have pushed the economy towards recession. Aggressive monetary policy actions are underway in the US and Japan.

But while these actions have reduced the probability of the severe downside risks to our central forecast from emerging, the global economy remains extremely fragile. The improvement in financial market indicators has done little to address the debilitating factors underlying our modal forecast for the world economy: an impaired and opaque banking system, severe fiscal austerity introduced in a synchronised way in Europe, persistent policy uncertainty despite recent improvements, and a widespread lack of confidence among households and firms, which have been repeatedly disappointed following apparent short-term economic improvements. So while risk aversion has clearly subsided in financial markets in the short term, it is far less clear that this has affected the risk appetite associated with household saving and firm investment decisions. On top of this, world trade has slowed more markedly than expected, which will impede growth particularly in export-sensitive economies such as Germany and Japan.

Downside risks to the outlook include the stock cycle, as there is some evidence of excess inventory accumulation related to the slowdown in world trade; renewed tensions in relation to the Euro Area crisis; and a more abrupt fiscal adjustment in the US when the March sequestration deadline arrives. Some modest upside risks include successful implementation of the supplementary budget in Japan and additional monetary easing in the Euro Area.

NIESR's detailed forecast is available here (£).