What's Ahead for the Global Economy?

So far in 2014, the performance of the global economy has been quite mixed and this is expected to remain the case for the remainder of this year.  On one hand, some of the world’s leading economies are clearly improving and are forecast to continue improving over the last few months of this year.  On the other hand, other leading economies are forecast to continue to struggle to achieve significant growth this year, preventing the global economy from achieving the level of growth realized prior to the global economic downturn that began more than six years ago. 

Since the beginning of the global economic downturn in 2008, the global economy has growth by an average of just 2.9% per year, a far cry from the 5.1% annual average economic growth rates achieved in the four years before the crisis.  Over the past four years, the global economy has failed to reach an overall growth rate of over 4.0%, the first time that it has failed to do so since the world’s leading emerging markets were integrated into the world economy in the 1990s.  As has been the case for most of the past 12 years, developed economies have much to do with this relatively sluggish performance.  However, the emerging markets that have driven global economic growth for the past 12 years have also slumped in recent years.

Since 2008, developed economies have achieved an overall average economic growth rate of just 0.9%, their worst extended performance since the Second World War.  In recent years, the United States economy has rebounded from its slump to record higher rates of growth, as have other key developed economies such as Japan, Britain and Canada.  However, the Eurozone economy continues to hold back global economic growth, as Eurozone economic output is smaller now than in 2007.  Looking ahead, New World developed economies such as the US and Canada, as well as more diversified developed economies such as Britain and South Korea, are expected to realize higher rates of growth in 2015 and 2016.  However, the current slump in the Eurozone is forecast to continue over the next two years, while Japan’s recent recovery appears to have come to a screeching halt.

While the developed world has struggled to return to the levels of economic growth realized before 2008’s financial crisis, the emerging world has been a key driver of growth during this period.  Prior to the financial crisis, overall economic growth in emerging markets was averaging more than 8% per year, led by giant emerging markets such as China, India and Russia.  Even in the years immediately after the crisis, China’s strength allowed for overall emerging market growth to easily exceed that in developed economies.  However, emerging markets have also slowed markedly in recent years, with growth in emerging markets falling to 5.0% in 2012 and 4.7% in 2013.  With Chinese growth rates settling in at around 7%, and with other key emerging markets such as Russia and Brazil struggling to grow at all, emerging market growth rates will not return to their pre-crisis highs at any point in the near future.

These fluctuations in economic fortunes will have major implications for the global economy.  First, overall global economic growth rates are forecast to remain below 4% over the next two years, marking a clear end to the 5% growth rates that were regularly achieved in years before the financial crisis.  This will have a particularly large impact on export-oriented economies as demand levels in key export markets will not rise as fast as they did prior to the crisis.  As many of these export-oriented economies have shrinking domestic markets (such as Japan and Germany), they will face longer-term stagnation as they lose export competitiveness (shrinking labor forces, higher labor costs, etc.), as well as more intense competition for export markets.  Meanwhile, those economies with expanding domestic markets will achieve relatively higher rates of growth as they attract more investment and are more immune to external shocks than their export-oriented counterparts.