SIGNS OF LIFE

The global economy has been going through hard times in the past five years. The economic crisis has significantly affected the rate of GDP growth in the world. And frankly, the period of stagnation is a little too protracted. Nevertheless, recent forecasts by international financial institutions show that things are moving and the global economy is gradually recovering. However, full recovery remains a long way off.

The IMF anticipates growth

According to forecasts made by the International Monetary Fund, in 2014, the global economy is expected to grow by 3.7 per cent, compared to 3 per cent in the past year. Meanwhile, the IMF's forecast for 2015 is even more optimistic - the world GDP growth will reach to 3.9 per cent, with higher growth rates to be observed, as in recent years, in countries with developed economies. At the same time, according to the IMF, the risk of a slowdown in global economic growth is associated, in particular, with low inflation in the developed economies.

In general, the prospects for economic growth are optimistic. The overall picture points to an increase in economic activity and also to significant differences between the major countries and regions. For example, in advanced economies, GDP growth is projected at 2.2 per cent for the current year and at 2.3 per cent for the next year, but the situation is different in each of the developed countries. In the United States, economic growth is projected at 2.8 per cent this year over 1.9 per cent in the past year. This increase in growth is partly due to a reduction in the deterrent effect of cost factors as a result of the recent agreement on the budget.

In the Eurozone, the situation is somewhat different. By the end of 2013, this region slipped into 0.4 per cent recession, though the situation is expected to slightly improve in 2014-2015, with growth rates of 1 per cent and 1.4 per cent, respectively. In general, an increase in growth rates will be less significant in those European countries which were faced, in a varying degree, with financial difficulties, such as Cyprus, Greece, Italy, Portugal, and Spain.

In the emerging market and developing countries, economic growth is expected to reach 5.1 per cent in 2014 and 5.4 per cent in 2015. In China, there was a significant revival of growth in the second half of 2013, largely due to an increase in investment activity. However, this surge is likely to be short-term, partly due to policy measures aimed at slowing credit growth and capital appreciation. Thus, it is projected that growth will slightly slow in 2014-2015 to about 7.5 per cent.

Enhancement of external demand from the developed countries and China begins to favorably affect the economies of many other developing countries. However, domestic demand remains lower than expected in many countries. To some extent, this is due to the tightening of financial conditions and economic policy since mid-2013, as well as uncertainties in economic policy and political processes, the latter being particularly potent in hampering investment activity.

According to experts, the strengthening of global economic growth does not mean that the world economy is out of danger. Sustainable economic growth and regulation of vulnerabilities remain a priority for all countries. This said, the emerging market and developing countries are encouraged to carefully manage the risks associated with a potential change in the direction of capital flows. A drop in exchange rates should be allowed in response to worsening of external financing conditions. The recent recovery of China's economy shows that investment remains the prime mover behind the growth dynamics, and it is necessary to continue reorientation of domestic demand from investment to consumption.

The WB concurs with the IMF

Another major financial institution, the World Bank, agrees in general with the IMF. In the estimation of the WB, the global economy has reached a crucial point. According to the Bank's forecasts for this year, the global economy will be gaining ground, growth in the developing countries will gather pace, while the economies with high levels of income will finally hit the road to recovery after five years of crisis.

The build-up of growth rates in developing countries is supported by a positive dynamics in high-income countries and the continuing strong growth in China. However, in circumstances where the US Federal Reserve System begins to curtail a large-scale program of monetary stimulation, growth prospects are still vulnerable to the adverse factors associated with rising interest rates on the world markets and the potential volatility of capital flows.

For example, in December, the Fed announced a reduction in the monthly volume of asset buyout by 10bn dollars, down to 75bn dollars. It is expected that the volume of buyout will be reduced further. The European Central Bank and the Bank of Japan has not yet ruled out the possibility of new incentives, as the economies of their countries are still weak. The Bank of England gave up on new injections, making it clear that policy tightening is likely to take the form of higher interest rates rather than the sale of assets.

But let us come back to the World Bank's forecasts. According to WB estimates, the world economy will grow more slowly in the next three years than the IMF suggests. Thus, as projected by the WB, the rate of world GDP growth will first increase from 2.4 per cent in 2013 to 3.2 per cent in 2014, and then stabilize at 3.4 per cent and 3.5 per cent in 2015 and 2016, respectively.

GDP growth rates in developing countries will pick up from 4.8 per cent in 2013 to 5.3 per cent this year and then reach 5.5 per cent in 2015 and 5.7 per cent in 2016.

As for the high-income countries, the suppressive effect of such factors as fiscal consolidation and economic policy uncertainty on the growth of their economies will be weakened. As a result, the growth rate in this group of countries will reach 2.2 per cent in 2014, which corresponds to the IMF forecast, and then stabilize at 2.4 per cent in 2015-2016. The United States is leading among the high-income countries as regards the recovery rate: the country's GDP has been growing for ten consecutive quarters. The US economy is projected to grow by 2.8 per cent this year and then by 2.9 per cent and 3 per cent in 2015 and 2016, respectively. In the Eurozone, after economic contraction for two consecutive years, the growth rate is expected to reach 1.1 per cent in 2014 and 1.4 per cent and 1.5 per cent in 2015 and 2016, respectively.

Despite the fact that the main side risks that plagued the world economy over the past five years have decreased, the basic problems remain in place. Moreover, while in the time of global financial crisis the developing countries implemented budgetary and monetary incentive measures, the scope of these measures have currently declined and the balances of the state budget and the current account in most of such countries are in the red.

Now it is time to think about what actions to take in response to a significant tightening of the global financial markets. Countries with sufficient reserve funds as well as countries which enjoy great confidence of investors can rely on market mechanisms and macroeconomic policy in the new conditions and on regulation of the banking sector to mitigate problems related to a reduction in capital inflows. Other countries, in which the room for maneuver is limited, may have to resort to tightening of fiscal policy to reduce financing needs or to raising interest rates to encourage capital inflows. Implementation of major reforms can help enhance investor confidence by improving the long-term prospects. This can initiate a chain of events capable of stimulating growth in investments, including foreign ones, and stepping up production in the medium term.

Following an analysis of the forecasts by the IMF and the World Bank, it becomes apparent that the most difficult situation is in the European economy, particularly in the Eurozone. According to the European Bank for Reconstruction and Development (EBRD), the pace of economic recovery in the region remains low.

In the estimation of EBRD economists, the rate of growth in the region with transition economy will be at a modest level of 2.7 per cent in 2014, compared to 2 per cent in 2013. In the meantime, emerging market economies are still suffering from the outflow of capital, which is likely to continue given the expected tightening of the US monetary policy.

As a means of improving the situation, the countries in the region are encouraged to resume structural reforms and vigorously take up the phenomena caused by the crisis, including a high proportion of bad loans and the level of long-term unemployment.

Optimistic prospects

On the whole, international investors hold most optimistic view on the outlook for global economy in almost five years amid recovery of the developed countries led by the United States. According to a poll conducted by Bloomberg, 59 per cent of investors, traders and analysts noted the improved economic prospects. The share of optimists was a record high in the history of polling since July 2009.

It is noteworthy that 66 per cent of respondents reported a more positive attitude than a year ago, and nearly two-thirds of them indicated strengthening of the economy of the developed countries as the main favorable factor.

The improvement in the economic situation in the United States was noted by 72 per cent of respondents, whereas a year ago this opinion was shared by 53 per cent of respondents. A similar assessment of the Eurozone was made by 49 per cent of respondents, which is thrice as much as in January last year and is the highest percentage since September 2011, when the investors were asked the corresponding question for the first time.

Money is ready to follow the economy: 46 per cent of respondents cited the United States among the most attractive markets for investment this year, while the European Union was cited by 40 per cent of respondents, which is the highest percentage since October 2009, when the relevant question was first included in the survey.

Among the least attractive markets, Brazil was cited by 33 per cent of respondents, China by 29 per cent, and Russia by 27 per cent.

Meanwhile, according to a survey of top managers conducted by FTI Consulting Inc., Turkey, Spain and Poland have the most to lose in attractiveness to foreign investors after the curtailment of quantitative easing programs by central banks around the world.

According to this survey, 47 per cent of executives surveyed in 1064 international companies believe that the Turkish assets will partly lose their appeal when the flow of cheap money subsides. The same opinion with regard to Spain and Poland is shared by 46 per cent of respondents.

At the same time, the attractiveness of the US and German markets will grow, according to about a third of respondents. Over 40 per cent of respondents believe that the curtailment of stimulus measures will benefit the markets of the United States, Germany and China.

Spain, Indonesia, Brazil, Turkey, Poland and South Africa are likely to suffer from reduced infusion of money - an opinion that is shared by more than a third of respondents.

In the meantime, almost a third of companies surveyed believe that central banks should not begin to raise interest rates before 2016.

The global is slowly moving toward recovery. This movement has not been steady thus far, as problems persist and universal means of influence have not produced the desired effect. Nonetheless, the current situation gives ground for a certain positive outlook and belief in a better outcome. So, the patient is more alive than dead...