Fears over the global economy have re-emerged in a volatile week for Asia-Pacific financial markets. With China’s manufacturers lagging, doubts over Japan’s “Abenomics” and fears of recession in Australia, is the world economy’s growth engine starting to slow?
On Thursday, the United Nations’ Department of Economic and Social Affairs revised down its growth forecast for the world economy to just 2.3 percent in 2013, the same level as 2012, predicting only a gradual pick-up to 3.1 percent in 2014 on the strength US growth.
It had previously forecast 2.4 percent world growth this year, rising to 3.2 percent in 2014.
“Despite improved global financial conditions and reduced short-term risks, the world economy continues to expand at a subdued pace. After a marked downturn over the past two years, global economic activity is expected to slowly gain momentum in the second half of 2013 and 2014 on the back of accommodative monetary policies in developed and developing economies,” the report said.
However, it noted short-term risks concerning the “dire” eurozone economy, US fiscal adjustment and a slowdown in developing countries, with new risks emerging with the monetary expansion underway in the United States and Japan.
“Risks are still tilted to the downside and have the potential to derail, once again, the still feeble recovery of the world economy,” it warned.
In the United States, fiscal contraction is expected to weigh on demand, with the economy expected to slow to 1.9 percent in 2013 before rebounding to 2.6 percent next year, although “political gridlock and additional fiscal tightening could result in much lower-than-projected growth.”
China’s economy is expected to post 7.8 percent GDP growth in 2013 and 7.7 percent next year. However, the report said “the possibility of a slowdown to about 5 percent cannot be ruled out,” with risks including the housing bubble, shadow banking, lack of transparency in local government debt, excess capacity in many industrial sectors and challenges over restructuring.
“Without decisive policy action, a further moderation in GDP growth and rising financial risks could feed into each other to form a vicious cycle,” the report said. China’s weaker growth has already impacted on commodity markets, with exporters such as Australia feeling the effects of lower prices.
In Japan, Prime Minister Shinzo Abe’s reflationary policies are expected to boost GDP by 1.3 percent in 2013 and 1.6 percent next year – up from the UN’s earlier forecasts – although such measures “create heightened medium-term uncertainties regarding the sustainability of public debt”.
The BRIC economies are not expected to deliver either, with the UN noting a “significant deceleration in GDP growth in the past two years” in countries including Brazil and India.
Koo: It’s a matter of time
The success of Abenomics in driving the yen lower and stocks higher has surprised analysts, with the Nikkei Stock Average’s 40 percent gain in 2013 making it the standout performer among major markets.
However, this week’s market gyrations have given ammunition to critics, who have warned of a future debt crisis.
On Thursday, the Nikkei plunged 7.3 percent after Chinese manufacturing contracted for the first time in seven months, and amid concerns of an early end to the US Federal Reserve’s quantitative easing policy. The Bank of Japan (BOJ) intervened to smooth the bond market after yields spiked, with the yield on 10-year bonds reaching 1 percent, its highest level in more than a year.
Nomura Research Institute’s chief economist Richard Koo has written of Japan’s post-bubble “balance sheet recession,” however in his latest research note he suggested a “time inconsistency problem” for policymakers.
“The fact that the BOJ has also reversed the traditional order of things and is trying to spark an economic recovery by generating inflation has increased the possibility that higher long-term rates driven by inflation concerns will emerge sooner than higher long-term rates rooted in a recovery in the real economy,” Koo warned.
Abenomics’ nascent recovery could be snuffed out when it has only barely begun, he said.
Meanwhile, Australia’s sharemarket has posted its biggest weekly fall in more than a year. Leading economist Ross Garnaut has warned of “deep recession” without an “immense adjustment” through a radically lower exchange rate.
According to the UN, the solution lies in greater international policy coordination to “mitigate negative policy spillovers, curb protectionism, promote cooperation in reforming the international financial system, and ensure sufficient resource flows to developing economies.”
More evidence perhaps, that engineering a smooth global rebound was never going to be easy.