Global economy watch - June 2013

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GDP data for the first quarter of this year showed the Eurozone stuck in recession and the US quietly humming along.

Specifically, Eurozone output contracted in the first three months of 2013, marking the sixth consecutive quarter of negative growth. In this next phase of the crisis the slowdown has spread to the core of the bloc, with France slipping into recession and Germany recording modest growth.

The mood and outlook in the US is more positive. Unlike the Eurozone, the US economy is around 3% bigger than it was when the sub-prime crisis unfolded and is on track to grow by around 2% this year.

While the recovery is on hold in some advanced economies, businesses are seeking to increase and diversify their revenue base: one area that could contribute to their growth strategy is the booming trade in services which we’ve focused on this month.

On a global scale, service imports amounted to around 3.9 trillion dollars in 2011. Although smaller than the tangible goods market, the growth potential in services is tremendous.

This is because as emerging markets become bigger and wealthier demand for services will shift from the West to the East. In fact, 2010 marked the first time since reliable records began where the value of services imported by emerging economies exceeded that of the G7.

Advanced economies have only to benefit from this trend as most have a advantage in service activities. Our heat map shows specific service sectors ranging from finance, to communication to construction have been growing fast for the past five year.

At a glance

Key messages:

  1. Eurozone GDP contracted for the sixth consecutive quarter. In contrast, US GDP expanded by 0.6% and is now around 3% above its 2008 level.
  2. Our in-house index indicates global consumption is growing by 1.8% per annum, which is below long-term trends.
  3. 2010 marked the first year when services imports by emerging economies exceeded those of the G7 economies. Service sector companies in advanced economies should be the main beneficiaries.
  • Eurozone output contracted in the first three months of 2013, marking the sixth consecutive quarter of negative growth. Although this was not a surprise for the peripheral economies, the slowdown has spread to the core. France, the second largest economy in the bloc, has now slipped into recession. In light of the new data, we have revised down our 2013 Eurozone main scenario growth projection from -0.4% to -0.6 %.
  • By contrast the US recovery has consistently outpaced that in the Eurozone since mid-2011. US output is now above its pre-crisis level standing around 3% higher than its 2008 peak (see Figure 1). We project the US economy to grow by around 2% in 2013 led by private sector domestic demand.
  • Our latest monthly Global Consumer Index (see page 2) shows that, at a global level, consumption is expanding at a rate of around 1.8% per annum, some way below its long run trend rate.
  • One area that could contribute to business growth is the booming trade in services. Global services imports were worth around 3.9 trillion dollars in 2011 (roughly equivalent to the size of the German economy). Although still smaller than goods imports, the growth potential of services trade is tremendous.
  • Specifically, 2010 marked the first year since reliable records began during which the value of services imported by emerging economies exceeded that imported by the G7 economies.
  • As emerging markets become bigger and wealthier, demand for services is likely to increase further. Figure 2 shows that the value of services imported by the largest emerging economies (the E7) grew three times as fast as that for the G7.
  • Advanced economies such as the US and the UK should benefit most from this trend as they have relatively large, sophisticated and efficient services sectors.
  • Our heat map shows that services imports of the E7 economies were greatest in the transport, financial services and insurance and travel (or outbound tourism) sectors.

Charts of the month

Figure 2 – In the five years to 2011, the value of services imported by the E7 economies grew three times as fast as that of the G7