World economy: Improving outlook

The outlook for economic growth is gradually improving in many parts of the world. Investors, businesses and consumers are becoming more confident, the Chinese economy is picking up after its downturn in 2012, and – despite a fourth-quarter contraction in GDP – there is evidence of a more sustainable recovery in the US. The Economist Intelligence Unit’s forecast for the world economy is largely unchanged this month: we still expect a modest upturn in 2013, leading to stronger growth in 2014. However, we have revised our exchange-rate forecasts, and now expect a weaker yen and a slightly stronger euro.

We forecast that global GDP will expand by 3.4% at purchasing power parity (PPP) exchange rates in 2013. This would mark an improvement on last year, but is still disappointing at this relatively advanced stage of a recovery. The global economy has yet to fully work off the effects of the financial crisis and multi-country housing bust of 2008-09, and the debt crisis in the euro zone -although moving into a less acute phase – remains both a real and present danger to financial stability and a serious drag on economic growth.

Yet, while trading conditions will remain difficult at least through the first quarter of this year, there are already encouraging signs on several fronts: witness the recent strength of US consumer spending and business investment, the pick-up in manufacturing prospects in Germany, Japan’s new-found political appetite for bolder economic stimulus, and the rise in risk tolerance in financial markets. The easing of financial tensions in the euro zone since mid-2012 is also a hugely important factor. The resulting gains will take some months to materialise fully, but give or take minor differences in timing from one country to another a pick-up in growth is likely from mid-2013. This, in turn, will create the momentum for a more marked global recovery next year, when we forecast world GDP growth of 4% in PPP terms.

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