Transitions and Tensions
Global growth is in low gear, the drivers of activity are changing, and downside risks
persist. China and a growing number of emerging market economies are coming
off cyclical peaks. Their growth rates are projected to remain much above those of the advanced economies but below the elevated levels seen in recent years, for both cyclical and structural reasons. The United States has seen several quarters of solid private demand.
Although public sector demand has been pushing in the opposite direction, this counterforce will diminish in 2014, setting the stage for higher growth. Japan’s economy is enjoying a vigorous rebound but will lose steam in 2014 as fiscal policy tightens. The euro area is crawling out of recession, but activity is forecast to stay tepid. In these three advanced economies, much
slack remains and inflation pressure is expected to stay subdued.
These changing growth dynamics raise new policy challenges, and policy spillovers may pose greater concern. Two recent developments will likely shape the path of the global economy in the near term. First, markets are increasingly convinced that U.S. monetary policy is reaching a turning point. Talk by the Federal Reserve about tapering its quantitative easing measures led to an unexpectedly large increase in long-term yields in the United States and many other economies, much of which has not been reversed despite a subsequent decision by the Federal Reserve to maintain the amount of asset purchases and policy actions in other countries.
Second, there is strengthening conviction that China will grow more slowly over the medium term than in the recent past––previous expectations that the Chinese authorities would react with a strong stimulus if output growth were to decline toward the government target of
7½ percent have had to be revised.
persist. China and a growing number of emerging market economies are coming
off cyclical peaks. Their growth rates are projected to remain much above those of the advanced economies but below the elevated levels seen in recent years, for both cyclical and structural reasons. The United States has seen several quarters of solid private demand.
Although public sector demand has been pushing in the opposite direction, this counterforce will diminish in 2014, setting the stage for higher growth. Japan’s economy is enjoying a vigorous rebound but will lose steam in 2014 as fiscal policy tightens. The euro area is crawling out of recession, but activity is forecast to stay tepid. In these three advanced economies, much
slack remains and inflation pressure is expected to stay subdued.
These changing growth dynamics raise new policy challenges, and policy spillovers may pose greater concern. Two recent developments will likely shape the path of the global economy in the near term. First, markets are increasingly convinced that U.S. monetary policy is reaching a turning point. Talk by the Federal Reserve about tapering its quantitative easing measures led to an unexpectedly large increase in long-term yields in the United States and many other economies, much of which has not been reversed despite a subsequent decision by the Federal Reserve to maintain the amount of asset purchases and policy actions in other countries.
Second, there is strengthening conviction that China will grow more slowly over the medium term than in the recent past––previous expectations that the Chinese authorities would react with a strong stimulus if output growth were to decline toward the government target of
7½ percent have had to be revised.
English: Emerging Markets without China and India (Photo credit: Wikipedia)
The October 2013 Global Financial Stability Report (GFSR) explains how spillovers from these changed perceptions have already provided a sort of mini stress test for financial systems. In emerging markets, the spillovers interacted with existing vulnerabilities and triggered both desirable and undesirable adjustments.more
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