Yet another year of lackluster growth for global economy

LONDON: Try as hard as it can, the global economy has not been able to break out of the 2.5–3% growth range experienced since 2011. The pattern of gradual acceleration in advanced economies and deceleration in emerging markets is set to continue in 2015. Despite slight downward revisions to the 2015 growth outlook for the US and UK economies, real GDP growth in the advanced economies should increase from 1.8% in 2014 to 2.1% this year. Meanwhile, growth in the emerging world is projected to slow from 4.5% in 2014 to 3.9% this year. As commodity prices stabilize and recover, the growth rates in many emerging markets (not including China) will likely rise.

The good news for the global economy is that domestic demand growth remains strong in the United States and is strengthening in Europe.

This was the crux of the IHS Global Insight’s May World Flash, an update on the global economy from IHS Chief Economist Nariman Behravesh and IHS Senior Research Director Sara Johnson.

United States: Domestic demand is a better guide to the underlying strength of the economy than GDP. US real GDP increased at an annual rate of just 0.2% in the first quarter, restrained by harsh winter weather, work stoppages at West Coast ports through February, and a plunge in oil-related capital spending. In the preliminary GDP report, real domestic purchases grew at a 1.5% rate. New data suggest a downward revision in first-quarter GDP, resulting in a contraction. US real GDP is expected to advance at a 2.1% annual rate in the second quarter, led by pickups in consumer spending, homebuilding, and business equipment investment. Inventory investment will slow sharply, however. After 2.4% growth in 2014, real GDP is projected to increase 2.3% this year and 2.9% in 2016. However, real domestic purchases are expected to accelerate from 2.5% in 2014 to 2.8% this year and 3.2% next year.

Europe: More turbulence, but the fundamentals are good. In recent weeks, the Greek crisis and the rout in the bond market have dominated the headlines. Nevertheless, the fundamentals in the Eurozone remain strong, as the region benefits from sharply lower oil prices, a weakened euro, and monetary stimulus. The Eurozone should be able to achieve real GDP growth of 1.5% in 2015 and 1.9% in 2016—up from 0.9% in 2014. While first-quarter data on the UK economy were disappointing, the picture of robust growth in the next two years remains intact, helped by the decisive Conservative Party win in the recent elections.

China: A worried government provides more stimuli. Further signs of slowing Chinese growth are motivating new stimulus efforts. The deepest slowdowns are in construction and heavy industry. IHS Global Insight expects the central bank to implement more interest-rate cuts, infrastructure investments, and policies targeting the housing market. The stimulus will remain measured, unless economic growth declines precipitously.

Other large emerging markets: The gap widens further. Recent data confirm our upbeat view that India’s growth will average around 8% in the next three years. Easing inflation, lower production costs, and falling interest rates are boosting domestic demand. At the other extreme, the Russian economy will worsen as high inflation erodes consumer purchasing power. Real GDP is expected to decline 4.8% this year and 1.4% in 2016. Brazil is also in recession—although not as deep as Russia’s. Yet, with broadening corruption investigations and a crisis of confidence, Brazil’s prospects could deteriorate even more.

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