How risky is the global economy?

Reflections on the EY Rapid Growth Markets and Eurozone Summer forecasts

Is Summer here to stay?

The sun has been shining but the global economic news in the last few weeks has been gloomy, dominated by worries over monetary policy in America and China, political problems in Brazil and Turkey, and the continuing lack of growth in Europe.

Global overview – back to normal?

But before we become too despondent, it is important to note that as The EY Rapid Growth Market Forecast shows, outside of the Eurozone, the world economy is growing. The rate of growth is not yet at the levels we experienced from 2005 to 2008, but it is now widely accepted that these rates of growth were unsustainable and were responsible for many of the imbalances that led to the financial crisis of 2008. We may be on the verge of a period of steady but sustainable global growth: the sort that we would have felt was “normal” between 1980 and 2000.

We have heard much about the “new normal” and, in even the “new abnormal” to describe how unconventional monetary policy (ie QE) is distorting world markets. Now might be the time however to start thinking about the world economy beginning a journey of normalisation as it adjusts to the prevailing conditions.

We are seeing the fast growing emerging markets of the last decade becoming mature economies and moving from commodity, export and investment led growth, to more balanced economies. Inevitably this requires structural reform if they are to continue to develop. As they mature, their citizens will also demand a greater stake in the political and economic process, demanding an increased level of social provision. This is the same process that many of today’s developed economies went through after periods of rapid industrialisation. It may be challenging and volatile, but growth in new markets often comes with a higher risk than expanding close to home – this has always been the case, it is just that we forgot it.

The global economy: warming up gently

Our latest economic forecasts highlight the following global drivers :

  • The US economy is strengthening and the Fed should take a great deal of credit for how it has used monetary policy. The US is increasingly competitive due to its flexible labour markets and the shale gas revolution and has all the basics in place for a steady, if unspectacular, recovery. There are risks around QE but these are caused by a strengthening economy, not a declining one.
  • China is embarking a new economic and political reform process, which will help it to become a more consumer centric economy. This is a difficult transition but if any country has the resources and levers to deliver change on this scale it is China. The good news is that as wages rise, China will becomes a bigger market for the UK to sell its consumer goods to.
  • Japan will continue its reform, boosting its export strength but also creating more opportunity for imports with direct benefits to the rest of Asia in particular.
  • According to our RGM forecast, the BRICs, apart from China, are also struggling and many need to implement structural reforms. As this happens, we can expect to see the new emerging markets come to the fore such as Indonesia, Columbia and Mexico.
  • Europe remains in the doldrums. The South is implementing reform to improve its cost competitiveness but the North still faces challenges around liberalising its product and service markets and, without this, it’s unlikely that new demand will be created. With slow progress on banking and fiscal reform and with increasing unemployment, Europe risks a lost decade.

Will the UK benefit from a recovering world?

As our forecasts indicate, the global economy is steadily improving. Risks remain but, in a large part, these reflect the potential consequences of necessary policies such as tapering QE, rebalancing China, and reflating Japan. Political risks in certain markets have increased but this is not unprecedented. The European economy remains in recession but this is not a new development.

The EY ITEM Club Summer forecast will provide a detailed perspective on the implications of these global developments for the UK.Is the strength of the global economy sufficient to offset the problems in Europe, the UK’s largest export market? Is the UK economy on the move? Look out for the report on Monday (15 July 2013) for the answers to these key questions.

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