By Judith Ugwumadu | 07 February 2014
The world economy will grow by 3.7% in the next two years but recovery is still sluggish, according to the National Institute of Economic and Social Research.
In its quarterly review, the think-tank claimed growth prospects had mainly improved in advanced economies, especially in the US, which would mean growth was higher than the 3.1% recorded in 2013. However, the outlook remained disappointing in the eurozone and Japan, and the growth prospects of some of emerging market economies had also deteriorated.
It stated: ‘The gradual slowdown in China is proceeding broadly as we expected, but near-term growth prospects for Brazil, India, Russia and a number of other emerging market economies have deteriorated, and financial pressures have appeared in Argentina, Russia, Turkey, and other countries.’
In addition, the NIESR noted central banks would likely need to provide some assurance that their current supportive fiscal policies, such as low interest rates and quantitative easing, will continue even if recoveries ‘become more entrenched’. It also found that fiscal policies were less restrictive than in recent years in most advanced economies.
With high unemployment coupled with moderate and uneven growth the NIESR predicted inflation in advanced economies would continue to decline. However, it stated that sustained below-target inflation, and possible deflation, posed risks to its projections and could impede recovery.
‘In particular, adjustment in the euro area would be more balanced and less costly if inflation were at its target on average, and above average in the core countries,’ it stated. ‘With the exception of the US, there has been only a small reduction in private sector debt burdens. This adjustment would be considerably more difficult in a deflationary environment.’
Better growth and low borrowing costs could lead to a further appreciation of asset prices, which may ‘complicate’ accommodative monetary policies. ‘Whether central bankers’ new tool box of macro-prudential measures can in fact contain such pressures against this backdrop remains to be seen,’ it stated.
While the overall picture is one of strengthening activity in advanced economies, the review highlighted that risks remain in the eurozone until the single resolution mechanism, an integral part of a banking union, is in place.
‘Until there is real progress on providing a pooled public backstop, it is difficult to see how a credible banking union will emerge,’ the think-tank stated. ‘With bank lending to the private sector already weak, this could be very damaging to prospects for continuing recovery.’
