Global Economy Watch (GEW) - August 2013

Transcript

The global economic recovery is still struggling to take hold. In July, the IMF downgraded its projections of global economic growth to 3.1% for 2013, bringing it in line with our projections.  This is now the fifth consecutive downgrade of global growth. While still outpacing advanced economies, slowing growth in large emerging economies like China, is driving this deteriorating outlook.  

This month, we have taken a closer look at the good, the bad and the ugly in the peripheral Eurozone countries.

On the bright side, Portugal, Ireland, Italy, Greece and Spain have all made significant progress in regaining some of the competitiveness lost in the years before the crisis. Industries like tourism have benefited from falling costs; in Spain for example, foreign tourist arrivals have increased by 23% since the financial crisis began. But most of the progress has come from one-off factors, such as nominal wage and job cuts, rather than structural reforms to inflexible labour markets.

The state of public finances across the peripheral economies remains bad. Progress has been made in reducing government spending- in Portugal spending has decreased by around 20% since 2011. However, the lack of economic growth has meant that government’s stock of debt relative to the economy continues to increase.

Finally, the status of the labour market in peripheral Europe remains ugly. Unemployment is roughly double the Eurozone average of 12%, while high and rising youth unemployment poses a risk to future productivity and medium term growth.

At a glance

Key messages:

  1. Headwinds stemming from a slowdown in emerging markets are dragging down global growth prospects
  2. Peripheral Europe is regaining competitiveness, but a lack of substantial reform suggests that some of the progress could be temporary
  3. Risks are building in emerging markets, and central banks are facing a delicate balance between encouraging growth and fostering stable price levels and exchange rates
  • The global economic recovery is still struggling to gather momentum. Over the last few months we have been lowering our growth projections for some of the larger emerging markets. And in July, the IMF downgraded its projections of global economic growth to 3.1% for 2013. This is now their fifth consecutive downgrade of 2013 global growth prospects since early 2012.
  • While still outpacing growth in advanced economies, a slowdown in Asia and other emerging markets is contributing to this deteriorating outlook.
  • This month, we take a closer look at the good, the bad and the ugly in the peripheral Eurozone countries.
  • On the bright side, Portugal, Ireland, Italy, Greece and Spain have all made significant progress in regaining some of the competitiveness lost in the years before the crisis.
  • Tourism is an important sector for most of these economies, accounting for up to 5% of GDP, and it has been a beneficiary of falling costs and prices. in Spain for example, foreign tourist arrivals have increased by 23% since the financial crisis began.
  • The state of public finances across the peripheral economies remains bad. Progress has been made in reducing government spending – in Portugal spending has decreased by around 20% since 2011. However, the lack of economic growth has meant that the size of the  stock of government debt relative to the economy continues to increase.
  • The status of the labour market in peripheral Europe remains ugly. Unemployment in Greece and Spain is roughly double the Eurozone average of 12%, while high and rising youth unemployment poses a risk to future productivity and medium term growth.
  • Finally, we take a look at how stock markets have performed over the summer months.

Charts of the month

Figure 1 - Tourism is more important to peripheral economies than other economies in the Eurozone

Figure 2 – £100 pounds invested in most stock indices a decade ago would have grown substantially more if investors followed the ‘Sell in May’ principle