Worldwide: Economic Updates - October 2014

Last Updated: 16 December 2014
Article by Steve Stivala

Global overview

2014 has so far proven to be an eventful year. Looking at economic data one can easily see signs of progress and recovery especially amongst the world's advanced economies. This bodes well for the future as positive news should continue to promote confidence in global markets and boost a global economic recovery. At the same time political turmoil is threatening the delicate stability governments have fought for over the past years. Disputes in the Middle East and between the Ukraine and Russia have lead to uncertainty over the future of the oil and gas markets.

The European Union continues to face difficulties. Euro‑skeptic pressures from various member states cast doubt on the future of the political union, whilst the European Central Bank's decision to implement a negative deposit rate for banks shines a light on the risk of deflation in the Euro Area. Nevertheless, for the first time in many years economic outlook is positive and the trend across the EU appears to be similar to that in the US – a slow but steady growth.

The United States is still experiencing slow but steady economic growth and this is predicted to continue increasing over the coming years. Household income and consumption expenditure continue to rise, inflation remains low and unemployment relatively high however trends both show these figures slowly converging to normal levels over the coming years.

The outlook in developing economies is mostly positive. The IMF estimates that, on average, developing economies will experience 5.2% and 5.3% growth over the remainder of this year and next year respectively. Stark contrasts can still be found, the outlook for Russia is less positive as a result of sanctions arising from the conflict with the Ukraine. Brazil is facing a period of low demand and high inflation and is being scrutinised over the funding directed towards hosting the World Cup rather than other economic and social projects. On the other hand, India and China both appear to be experiencing strong growth relative to Western economies and future forecasts predict economic stability as this rapid growth gradually continues to slow down.

European Union

The last few years have not been easy for European economies, seemingly crisis after crisis has befallen them calling into doubt the viability of the Union from both political and economic aspects. Despite this, the economic position of the European Union is picking up momentum. In the spring forecast issued by the European Commission it is estimated that GDP growth across the Union will average 1.6% in 2014 and increase to 2% in 2015. Other economic indicators such as inflation and unemployment are expected to start showing signs of convergence to normal levels by around 2016.

The situation however still remains very fragile. Falling inflation rates have resulted in rather unconventional monetary policy being put in place by the European Central Bank. The negative interest rate of -0.1% on bank deposits is clearly aimed at encouraging them to lend out liquid assets at relatively cheap rates in order to help fuel increased demand across the Euro Area. Increased demand should in theory lead to economic growth and a healthy rise in inflation. The European Commission is in fact predicting that during 2015 inflation should start to stabilize between 1% and 2% for most nations in the Union. 2015 is also the earliest estimate when Greece and Spain should once again see their inflation rates rise above 0% for a full year.

A new development indicated during the last European Parliament elections is a notable change in political sentiment, with Euro-sceptic politicians now commanding a significant portion of seats in parliament. This trend coincides with the gradual economic recovery being observed across much of the EU following a period of poor performance. However with rising uncertainty elsewhere in the world it would not as yet be prudent to say European economies are out of the woods. Changes in the political landscape both within and outside of the EU may very well impede the pace of economic recovery.

Malta Malta has managed to endure the turmoil in Europe relatively well and the outlook for the future continues to look good. Estimated GDP growth is steady at 2.3% for 2014 and 2015 putting the small island in good company with the likes of the UK and Germany. Inflation also looks promising at 1.2% in 2014 rising to 2.0% in 2015. Employment outlook once again also looks positive when compared to the rest of the EU with the unemployment rate expected to fall gradually from 6.3% to 6.1% between 2014 and 2016.

An unfortunate reality for Malta has been that the situation in Libya has still not stabilized. Following the revolution there was much optimism about potential cooperation and trade between the two nations. However as the situation deteriorated once again, and does not show any sign of calming down in the coming months, local investors have been hesitant to proceed with expansion plans.

Forecasts by the European commission show that the government deficit will hold at around 2.5% of GDP during 2014 and 2015, whilst overall national debt should fall from 72.5% of GDP to 71.1% of GDP during the same time period. This is attributed in part to economic growth as well as increased tax revenue and discretionary fiscal policies. However the European Commission's report also highlights a significant increase in public expenditure is due to increased public sector employment, social payments and capital transfers to public corporations. Measures currently being undertaken by the government to address the issue of public finances include a comprehensive spending review as well as the Individual Investor Programme aimed at attracting more foreign investment to the economy.

USA

The situation in the United States is improving over last year. The IMF is predicting that growth for 2014 should be around 2.7% and that this should rise to 3% in 2015. Adjustments to spending and taxation have continued to have a stabilizing effect on the economy whilst household income and consumption expenditure have continued to rise. On the other hand, Personal interest expenses have continued to fall as households seek to reduce their debt burden and strengthen their financial position. Industries such as real estate and energy have continued to grow, coupled with lower household debt levels and improved stock market performance will continue to fuel growth in the coming years.

Tracking the progress of certain macroeconomic indicators also confirms the good progress being made by the US economy. Data shows that during the immediate aftermath of the financial crisis unemployment rose sharply to well over 9% and the economy entered a brief period of deflation. The picture today, and the one predicted in the coming years is significantly different. Unemployment is predicted to average 6.4% during 2014 falling to 6.1% by 2016, whilst inflation should rise steadily from 1.4% to 1.8% during the same period. Assuming the economy faces no major stumbling blocks along the way indications are that the economy is slowly regaining momentum.

In last year's issue of Insight it was pointed out that the fiscal cliff crisis was barely avoided and that political conflict risked slowing down the economic recovery. The October government shutdown continues to show how immediate action is needed to regain control over the federal deficit and nation debt. Whilst it is true that steps have been taken and that the deficit has begun a downward trend, IMF estimates show that the US national debt will exceed $20 Trillion (or 105.6% of GDP) by 2016. Analysts expect the deficit to continue falling in the coming years however warn that as the baby boomer generation gets older pensions and health-care expenses will increase sharply taking their toll on public finances.

China and India

China and India are the 3rd and 7th largest nations globally and together they comprise over a third of the global population and make up the 2nd and 3rd largest economies. Despite recent claims that economic growth in the region is slowing down, both nations still manage to successfully outperform the global average by a very significant margin. In the case of China, economic growth is predicted to be 8.4% during 2014 slowing to 8.3% by 2016, whilst India's growth is predicted to accelerate from 6.6% in 2014 to 7.8% in 2016. It is no wonder why these two nations are viewed as the world's emerging economic and political superpowers.

Looking more in depth at the two nations however, certain differences are immediately obvious. As stated before, China's GDP growth is slowing down whereas India's is increasing. Looking at other metrics it is possible to see that China should manage to keep inflation constant at 3% from 2014 through to 2016 whilst India will try to rein it in from 8% in 2014 down to 6.9% in 2016. All this indicates that the Chinese economy is at a much more mature point than its counterpart, this is again reflected in the public debt data with the Chinese deficit predicted to fall from 2% of GDP to 1.3% of GDP between 2014 and 2016, whilst that of India is expected to drop from 7.2% down to 6.8% of GDP in the same time.

The strength of both these economies lies in their positions as market leaders on an international scale. Both nations have seen consistent growth in exports and this trend is expected to continue into the future. IMF estimates show that China's export growth is to be around 6.8% during 2014 and remain relatively constant over the next two years with 6.9% estimated for 2016, consistent with the stable rate of economic growth the country is facing. India on the other hand is expected to see exports and GDP grow along side one another with estimates claiming 6.5% growth in exports during 2014 increasing to 8.1% by 2016.

A similar situation is also present with regard to imports of both countries. Industrialization and rapid economic growth also brought along a rapid increase in the wealth of the citizens of both nations, fuelling demand for ever increasing amounts of consumer goods. Rapid economic growth has also necessitated increased expenditure on capital and energy. Hence it is no surprise that as these two economies grow at a rapid pace so does their demand for imports. Data shows once again that China's growth is slower than that of India with import growth for 2014 estimated at 7.1% slowing down to 6.2% by 2016, whereas the numbers for India are 6.2% growth during 2014 rising to a stable 8.7% in 2015 and 2016.

Looking forward

Current trends and estimates are looking positive and signalling that the global economy is on its way to a period of growth and recovery. However, it is always important to take such predictions cautiously. The reality of a connected and globalised economy is that the actions of each and every player have the ability to resonate and distort, for better or worse, any prediction one can make. Developments in Europe and the Middle East over the next year have the potential to deeply impact global markets and influence the economic situation on a global scale. Growth in the US is picking up and several key markets are already recovering. Furthermore growth in technology based industries is looking to be ever more important as are other high value added knowledge based sectors. An important issue to handle in the coming years is to project an image of stability with regards to the American economy. Hence policies to support growth and control public spending will be ever more important as the world's eyes once again scrutinize the nation during the upcoming 2016 presidential elections.

The situation in Europe has definitely improved over last year and will continue improving in the years to come. Challenges in the immediate future are more likely to stem from political issues rather than purely economic ones.

The conflict between the Ukraine and Russia has the potential to disrupt the gas market within the EU leading to supply shortages. Furthermore, tensions within the EU itself could harm economic cooperation between fellow member states.

Malta should continue to look to the future and be creative in attracting new and innovative investment to the island. A renewed focus on education and a determined drive to support knowledge industries can help the nation overcome its small size and limited resources. Incentives to encourage foreign investment can help make Malta a hub through which business in emerging markets can arrive into Europe.

Strong emerging economies such as China and India should look forward to a period of growth in the coming years as the rest of the world recovers and shows increased demand for their output. However the interim period should be spent analyzing the structures of their economies, sorting out any evident inefficiencies and investing in sustainable industries to prolong their rapid advancement for as many years as possible. Furthermore, as the future resource needs of these economies grow it will become increasingly important to ensure that growth is carried out in a responsible and sustainable manner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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