We expect a modest strengthening of global growth over the next two years relative to 2013 and 2014, largely originating from the advanced economies, and the U.S. in particular. Growth in the emerging economies as a whole will increase somewhat in 2015 and 2016 relative to 2014, but progress will be constrained by a further projected slowdown in China. Even though this outlook shows much the same growth dynamics as before, it embeds a slightly more pessimistic view of growth prospects in the short term. Indeed, global growth remains lower than in our spring outlook all the way to 2016 in spite of projected lower oil prices.
Section I presents recent world economy dynamics and the global outlook for 2014-2016, including prospects for Canada. Section II outlines a base-case scenario for global growth over 2017-2020. Our purpose is twofold: to draw attention to factors or developments that are likely to shape growth prospects beyond the short-term horizon and to give an idea of the most probable range of growth rates to be expected as the medium term starts unfolding. Section III briefly examines prospects for global trade growth and discusses where things stand with respect to international trade arrangements and negotiations, including Canada's North American trade agenda and U.S. trade policy after the recent mid-term elections.
Section 1: Global Short-term Outlook: 2014-2016
Recent World Economy Dynamics
The world economic recovery lost steam in the first half of 2014 as once again a combination of transitory, cyclical and structural headwinds brought growth down below potential in many large economies. There were some bright spots: strong U.S. output growth in the second and third quarters, robust growth in the U.K., and strengthening growth in India. But mostly there were setbacks. Foremost among them were a decline of output in the large core economies of the euro area (Germany, France and Italy) in the second quarter and almost no growth in the third quarter, a more severe than expected contraction of activity in Japan, and an appreciable slowdown in Latin America, notably falling output in Brazil in the first half of the year. China also experienced somewhat slower growth in the first quarter, but since then has maintained overall growth more consistent with the official annual target (7.5 percent) thanks to stimulative policy measures.
In this context, price inflation in the U.S. although rising, still remains below two percent. Most importantly, wage pressures have not started materializing yet, which among other factors provides the Fed with leeway for delaying the first hike in its policy interest rate well into 2015 now that it has terminated its program of bond purchases (so-called QE3). Price inflation has fallen to very low levels in the euro area where concerns about potential deflation in the face of continued below-potential growth have become more widespread. Inflation expectations in the euro area have fallen significantly. To revive stubbornly sluggish demand and to raise inflation expectations, the ECB undertook this fall a series of measures that amount to a significant monetary policy easing. Japan has seen only a modest rise in inflation to a still very low level (excluding the effect of last April's sales tax increase) despite the efforts of the Bank of Japan.
Expectations of earlier increases in policy interest rates in the United States relative to other major economies have prompted a general appreciation of the U.S. dollar against other currencies, including the Canadian dollar. To a limited extent, this should help buttress the recovery in the rest of the world, notably the euro area, Japan and Canada. The appreciation of the U.S. dollar has also put downward pressure on commodity prices denominated in U.S. dollars.
Since last May, U.S. dollar prices for both Brent and WTI crude oil have dropped by about 25 percent, metals and minerals prices have been volatile but on a downtrend since last August, while lumber prices have generally strengthened modestly. Growing expectations of slower global growth as the new normal, notably for China and Europe, and increasing supply of non-conventional crude and base metal ores have contributed to the recent weakening of crude oil and metals and minerals prices. The fall in the prices of oil and related energy products, if maintained for some time, should stimulate real spending growth in net oil-importing regions, thereby boosting global growth.
Global Short-term Outlook: 2014-2016
The dynamics of global growth over 2014-2016 remain essentially the same in this Outlook as in our Spring 2014 Economic Outlook, notwithstanding significant negative surprises in 2014 and heightened geopolitical risks (Middle East, Ukraine, South China Sea). We expect a modest strengthening of global growth over the next two years relative to 2013 and 2014, largely originating from the advanced economies, and the U.S. in particular. The strong momentum in the U.S. economy experienced since April 2014 is expected to be followed by above-potential growth averaging 2.7 percent at an annual rate from the fourth quarter of 2014 to the end of 2016. This is a much faster rate than the two percent experienced in 2011-20131. Growth in the emerging economies as a whole will increase somewhat in 2015 and 2016 relative to 2014, but progress will be constrained by a further projected slowdown in China. Emerging economies will nonetheless continue to grow at a considerably faster pace than advanced economies.
Much the same set of factors as enumerated in our Spring 2014 Economic Outlook will drive the expected pick-up in growth. For the advanced economies, these factors include: continued easy monetary conditions (easier conditions in the euro area and Japan), a slowdown in the pace at which structural budget deficits are reduced by governments, less deleveraging, and improved confidence in the private sector. For the emerging economies, the stronger external demand from advanced economies, further progress in removing structural impediments to growth, and policy support to demand should enhance growth, although for commodity producing countries this may well be offset by the impact of lower prices for the commodities they produce.
The one factor that has changed markedly since the Spring 2014 Economic Outlook is a fall in the international price of oil. The lower price is expected to persist for a while and boost global growth over the short term.
Even though this outlook shows much the same growth dynamics as before, it embeds a slightly more pessimistic view of global growth prospects in the short term. Indeed, growth remains lower than in our Spring 2014 Economic Outlook all the way to 2016 in spite of the projected lower oil prices. In our view, repeated negative surprises in the data in the last three years point to a significant risk that the 2014 negative surprise partly persists over the short term. The potential root causes of these negative surprises are currently the object of a debate and will be briefly discussed in the second section of this outlook.
1 The small improvement in U.S. growth for the whole of 2014 reflects a crash of activity in the first quarter due largely to temporary factors.
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