The prospects for the global economy in 2013 have improved but the economic environment remains complex. Although the chances of an extreme event affecting international financial markets – such as a disorderly break-up of the eurozone – have diminished, the risks for global financial stability remain high.
In the advanced economies, the scope for monetary loosening is limited and fiscal constraints are poised to remain in place in the years ahead, hindering the capacity of economic authorities to react to new episodes of instability. Meanwhile,these economies will continue to undergo a deleveraging process which translates into weak growth and social and political pressures.
Growth in the emerging world has decelerated across many of the main economies as a result of diminished international trade and investment flows. This has triggered a downgrade of growth prospects affecting many important economies, particularly China, India and Brazil. However, domestic demand remains resilient which will allow these economies to continue to drive global growth.
According to Timetric, the outlook for the global economy is for a moderate recovery in 2013, with momentum improving from mid-year onwards and paving the way for a broader upturn of global GDP in 2014. Global growth is expected to pick up slightly from 3.2% in 2012 to 3.5% in 2013.
The main reason supporting this cautiously optimistic outlook is that policy uncertainty, which was an important factor dragging global growth last year, should moderate in 2013. Sufficient policy action by economic authorities in the second half of 2012, particularly central banks including the ECB and the US Federal Reserve, has contributed to stabilise financial markets and restore investor confidence, and this is poised to continue in 2013.
However, three major downside risks to global growth persist. First, while the ECB has given an important leap forward to curtail future debt crisis by announcing the launch of a public debt purchase programme in secondary markets – known as OMT (Outright Monetary Transactions) – the mechanism still needs to be implemented. This poses a significant challenge amid a context where austerity measures will continue to act as a drag on growth.
Secondly, the US Congress effectively reached a last-minute compromise to avoid the so-called “fiscal cliff”, which would have triggered a surge in taxes and a cut in subsidies equivalent to 4% of GDP. However, the underlying structural debt and fiscal problems persist and this could trigger a new episode of volatility by the end of the year.
Finally, China seems to be recovering from a testing economic period, amid a key leadership transition that introduced new government authorities after a decade of the previous administration. Growth is expected to pick up slightly to 8.1% in 2013, up from a ten-year low of 7.8% in 2012, but the economy is calling for a vital rebalancing towards more domestic consumption in order to achieve sustainable growth in the years ahead. While policy action adopted in 2012 will kick in this year, boosting economic activity, downside risks to growth persist.
All in all, the main advanced and emerging economies will probably show improvements in their key macroeconomic indicators, although only some of them – albeit the majority – will deliver stronger growth in 2013.