World economy ‘will remain weak in 2013 and 2014’

5 Feb 13
Despite signs of improvement, the global economy remains ‘extremely fragile’ and growth will be below trend this year and next, economists warned today.

In its latest Global economic forecast, the National Institute of Economic and Social Research said it expected the world economy to grow by 3.3% this year and 3.7% in 2014, following estimated growth of 3.1% for 2012. This compares with last November’s forecasts for 3.4% for 2013 and 3.9% for 2014.

According to the NIESR, tensions on global financial markets have eased in recent months, while the ‘firm commitment’ to keeping the eurozone intact allayed fears of a ‘disorderly’ break-up of the single currency bloc. ‘This, in turn, has softened the risk of an imminent and widespread banking crisis,’ it said.

‘Outside Europe, policymakers in the US reached a last-minute fiscal agreement to avoid the most severe tightening measures that would have pushed the economy towards recession. Aggressive monetary policy actions are under way in the US and Japan,’ it added.

The NIESR noted, however, that significant downside risks to the recovery remained. Unemployment in advanced economies was still  ‘very high’ and overall growth continued to be below trend, which it estimates should be 4%–4.25%.

‘While these actions have reduced the probability of the severe downside risks to our central forecast from emerging, the global economy remains extremely fragile,’ it said.

In particular, it highlighted the ‘debilitating’ effect of the ‘impaired and opaque’ banking system, persistent policy uncertainty and a widespread lack of confidence among households and firms. It also reiterated concerns over the co-ordinated approach to austerity being taken in Europe. Last year, the NIESR claimed that, as well as hindering growth, synchronised efforts to reduce debts and deficits were actually adding to countries’ debt burden.

World trade has also slowed quicker than expected. This would particularly affect growth in export-oriented economies such as Germany and Japan, it added, noting that a stronger global recovery would occur only if confidence in the banking system was restored.

The eurozone economy is expected to remain in recession this year, shrinking by 0.2% after also reducing in size by 0.4% last year. Next year it should return to growth, with a 0.9% rise, according to the economists.

Japan’s economy is forecast to grow by 0.6% this year, higher if stimulus measures under discussion are successfully implemented, the report said.

The US economy is expected to grow by 2.1% this year and 2.4% in 2014, roughly in line with the 2.2% recorded last year.

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