Status update on the global economy

Figure 3 – In the aftermath of the financial crisis, a three-speed global economy has emerged

Figure 3 – In the aftermath of the financial crisis, a three-speed global economy has emerged

Six months ago we pointed out the rise of a two speed economy with the emerging economies growing faster than the advanced. The US has gradually broken away from the pack, with growth picking up back towards trend. In this section we have taken stock of the world economy within a new three speed economy framework.

Slow Lane: Eurozone/Japan – The Cyprus crisis showed that more needs to be done to transform Eurozone institutions in order to sever the link between governments and the banks (e.g. via a banking union). In the absence of such institutions and with ongoing public and private sector deleveraging (particularly in the peripheral economies), our main scenario projection is for the Eurozone to shrink by 0.4% in 2013.

Japan is also in a similar position; its output has remained virtually the same since 2008. But this could all change if the recently announced monetary expansion (see April Global Economy Watch) is coupled with fundamental structural reform of its economy.

Middle Lane: US – On the back of unprecedented monetary and fiscal stimulus, the US economy continues to grow close to its trend rate of 2%. Modest growth is expected to continue to fuel employment growth: in the past 12 months alone 1.9 million jobs were created.

Fast lane: Emerging economies – These economies are projected to exhibit buoyant growth rates on account of pro-market policies, robust domestic demand and relatively healthy financial sectors. The China GDP growth figures, for example, showed 7.7% growth in the year to the first quarter of 2013, with service sector growth outstripping industrial production growth.