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Global economic outlook: a bumpy recovery

Economic Quarterly Report


The growth of the global economy is and continues to be weak. The industrialised countries have contributed more to this growth than in previous years, while the contribution made by the emerging markets is declining. Even so, most of the global growth is still accounted for by emerging markets. Reasons for this slow growth are varied, but a monetary squeeze and geopolitical unrest in these countries certainly play a role. Overall, we expect a slight acceleration in the growth of the global economy this year, although risks will remain.

Slow progress

Economic growth during the first quarter of 2014 has been down on the last quarter of 2013. Industrial production worldwide grew more slowly during the first months of the year (Figure 1) and global trade even shrank. Slower growth in Asia, particularly China, coupled with an unexpectedly poor quarter in the US, where the American economy contracted by 1% compared to the previous quarter, were partly to blame. This poor showing in the US can be attributed to the extremely cold winter weather. Underlying data still point to an acceleration of growth this year and the next (Figure 3). In the UK the first quarter was stronger than initial estimates thanks to a higher than expected growth in business investment. This is a good sign for the sustainability of the economic recovery. The revival in the eurozone  is continuing, but is significantly weaker than in the US and the UK. A rebalancing of the economy and high unemployment are just two factors counteracting growth. Japan, with the strongest growth of industrialised countries this quarter, was the biggest positive surprise. This strong recovery was most likely caused by a temporary rise in investments brought forward due to sharp VAT rises introduced in April 2014. Based on underlying data and sentiment indicators (Figure 2) we anticipate a slight acceleration of growth in the industrialised world in 2014 and 2015 compared to 2013.

Figure 1: Declining growth in industrial production
Figure 1: Declining growth in industrial productionSource: CPB World Trade Monitor
Figure 2: The Purchasing Managers Index
Figure 2: The Purchasing Managers IndexSource: Reuters EcoWin

In the meantime, growth in emerging markets has in fact slowed compared to 2013. The slowdown in growth in China, as a result of a change in government policy, has been a major factor in this. However, there are significant differences between these various markets in the light of geopolitical developments and monetary policy, which have been a contributing factor in the fairly limited and historically slow recovery of global growth (Figure 3). Furthermore, this growth will rely mainly on emerging markets in the Far East, despite the slowdown in growth there.

Figure 3: Global growth
Figure 3: Global growth Source: IMF and Rabobank
Figure 4: Currencies respond strongly to political developments
Figure 4: Currencies respond strongly to political developmentsSource: Reuters EcoWin

Politics as a brake or motor

Political developments are having a considerable effect at present on growth expectations in emerging markets, in both a positive and negative sense. In Ukraine the political unrest has, unsurprisingly, led to a contraction in the economy during the first quarter, and in Russia to a slowdown in growth. The situation has also produced a decline in net capital flows in both countries. The currencies in both countries weakened substantially as a result (Figure 4). IMF assistance was required to prevent a balance of payments crisis in Ukraine, and in Russia interest rates were raised to support the rouble. The currency did stabilise, but at the same time the brakes were put on domestic consumption. The election of Petro Poroshenko as the new President of Ukraine signals a cautious first step towards a solution to the conflict, but the risk of ongoing political unrest in Ukraine in 2014 is a very real one.

In India, political developments have had precisely a positive effect. For the first time in 30 years a single party (the Bharatiya Janata Party) won an overall majority in the Lok Sabha (the lower house of representatives in India). This offers real opportunities for economic reforms in a country that is notorious for its slow political decision-making and excessive bureaucracy. This can increase the potential for growth in India, and as a result sentiment has much improved. Having said that, India’s structural problems will not be solved overnight and the current expectations are probably set too high.

In China too, politics are playing a major role. The government is continuing to push through a large-scale reform agenda. The quality of growth is increasingly taking precedence over quantity, but stability is the most important factor of all. Potential problems in the housing market or in the financial sector must therefore be kept under control, while the growth in China's GDP is slowing down by about 0.5 percentage point each year. As China is the second largest economy in the world, this relatively small slowdown has a relatively large effect on the global situation. And this slowdown is not evenly distributed throughout the year. Much like last year, the first few months of 2014 showed a faster slowdown in growth. The fear that growth would slow down faster than expected in China caused sentiment towards emerging markets in general to suffer. There are now signs once more of stabilisation, which is creating a more positive sentiment again.

Lastly, during the second half of 2013 rising political tensions in Turkey caused it to be one of the economies hardest hit by tapering. Political wrangling prevented policymakers from responding effectively to the situation. With the presidential elections in prospect (10 August) political pressure will remain intense and affect monetary and other policy - the recent cut in interest rates (Figure 5) was most likely the result of political pressure - with all the potential consequences this may have on sentiment and economic growth.

The unintended effects of monetary policy…

The drastic easing of monetary policy during recent years in the Western world has led to low interest rates around the globe and a hunt for meaningful returns. The winding down, or tapering, of this quantitative easing policy by the US has had a marked effect on the monetary policy of emerging markets. At the same time the easing of monetary policy by the ECB may cause policy inertia in the eurozone while the risk of yet more housing bubbles in some Western countries needs to be closely monitored too.

…in emerging markets…

About a year ago, the Fed announced that it would gradually wind down its quantitative easing policy (tapering). The fierce response that followed in the financial markets forced economically weaker emerging markets to take monetary policy measures, which the economically stronger emerging markets did not need to do (Figure 5).

The policy measures introduced since the announcement of tapering have had a major effect on growth expectations in emerging markets. Interest rates have been raised in order to calm the financial markets, but higher interest rates also restrain domestic spending. In countries which took policy measures quickly and where confidence was quick to return, such as India, economic growth will accelerate this year. Even so, growth will remain relatively low. In Turkey, effective and prompt policy measures were frustrated by political tensions. Combined with a substantial interest rate rise which was eventually introduced, this is expected to slow down growth in 2014. Growth is expected to accelerate again next year. This trend is also visible in Brazil and Indonesia, where monetary measures were taken quickly but where high inflation necessitated a prolonged period of significantly higher interest rates. In countries where no policy measures were needed, such as in South Korea, Taiwan and Poland, economic growth will pick up further in 2014 and 2015 (Figure 6).

Figure 5: Monetary policy responses vary considerably from country to country …
Figure 5: Monetary policy responses vary considerably from country to country …Source: Reuters EcoWin
Figure 6: ... as do growth expectations
Figure 6: ... as do growth expectationsSource: Rabobank

During the past few months, enthusiasm among foreign investors for the majority of emerging markets has been growing once again. While the unrest in Ukraine during March and April have tended to put the brakes on the total flows of capital to emerging markets, in May these rose again to their highest level since September 2012 when the Fed announced a third round of quantitative easing. As a result, many currencies appreciated in value (Figure 7). Besides an improved risk perception towards emerging markets, the recently increased interest rate differentials between industrialised countries and emerging markets is an underlying reason. The political developments already referred to, do however affect sentiment considerably, and not all countries benefit equally. What's more, there are still very real risks. In many countries little progress has been made on structural reforms. If the present low risk perception around the world were to rise, as a result of developments in the Ukraine or action taken by the Fed, for example, sentiment towards the fundamentally weaker countries could once again quickly deteriorate.

Figure 7: Investors once again more enthusiastic about emerging markets
Figure 7: Investors once again more enthusiastic about emerging marketsSource: Reuters EcoWin
Figure 8: Government interest rates in eurozone lower than before the crisis
Figure 8: Government interest rates in eurozone lower than before the crisisSource: Reuters EcoWin

…in the eurozone…

In the eurozone, the ECB's ongoing easing of monetary policy is likely to be one of the reasons behind the exceptionally low 10-year government interest rates in the monetary union at present (Figure 8). Unlike the Fed, the ECB has recently eased monetary policy. In combination with the better economic climate, this has relieved the pressure on governments to prop up both national and eurozone institutions further. This will not benefit the resilience of the eurozone countries against financial and economic shocks, and could ultimately lead to a return of the unrest on the financial markets (see further in this Economic Quarterly on Interest Rates and Currencies/eurozone or Loman en Wijffelaars, 2014). Viewed in this light, the European elections will bring neither the solution nor much change. Although Eurosceptic parties made huge gains compared to the last elections, they are not large enough or sufficiently homogenous to form a powerful block. A more likely scenario is a continuation of the excessively slow decision-making process towards further integration, bringing with it the risks of a return to a situation of unrest in the financial markets. 

…and on the housing market

Although the fall in house prices in a number of countries has been considerable in recent years, house prices in the Western world are still at a historical high (Figure 9). Low interest rates make borrowing cheap, and consequently lead to a rise in demand for houses and house prices in countries that were not so badly affected by the crisis or are recovering. In 2013 average prices rose again (Figure 9). In addition, house prices in the Western world are still higher than before the start of the Great Recession, which might lead one to believe that new housing bubbles are being created in some countries. For example, the relatively simple ratio of house prices to income (price to income ratio) is slightly lower on average, but the ratio for rented properties (price to rent ratio) is already above the long-term average. The differences between countries, however, are considerable (Figure 10), and to gain a full picture, country-specific institutional characteristics of the housing market and the debt position of households also need to be borne in mind.

Figure 9: Development of house prices and affordability ratios in OECD countries
Figure 9: Development of house prices and affordability ratios in OECD countriesSource: OECD
Figure 10: Significant differences in affordability ratios
Figure 10: Significant differences in affordability ratiosSource: OECD

Nevertheless, policymakers must keep a close eye on developments in the housing market (see also Stegeman, 2014). Since long-term actual interest rates are currently very low, it is important for countries to pursue a prudential policy to keep the housing market under control. By this we mean policy measures which positively encourage financial stability and reduce uncertainty. For the housing market this could, for instance, be a cap on the loan-to-value ratio or the loan-to-income ratio. It remains to be seen whether governments will be willing to do so, because it may also curb economic growth in the short term. Without good policies, the risks for the longer term will however be much greater.


Recent developments have not substantially altered our expectations of a recovering global economy. An acceleration of growth must come from the industrialized world, as a number of emerging markets continue to be confronted with problems. Coupled with this, political stability and policy are important risk factors for economic growth in emerging markets. In particular, countries with fundamentally weaker economies remain vulnerable to a rising global risk perception and a further tapering of monetary easing in the Western world. If, however, monetary policy is not tightened up in time, this will increase the risk of new economic bubbles developing and policy inertia. The challenges facing monetary policymakers are still very great.


The Economic Quarterly Report is a publication of the Economic Research Department (KEO) of Rabobank Nederland and a co-production with Financial Markets Research van Rabobank International.

The views presented in this publication are based on data from sources we consider to be reliable. Among others, these include EcoWin, Land Registry, NVM, DNB, CPB and Statistics Netherlands. The economic growth forecasts are generated from the NiGEM global econometric structure models.

This data has been carefully incorporated into our analyses. Rabobank Nederland accepts, however, no liability whatsoever should the data or prognoses presented in this publication contain any errors. The information concerned is of a general nature and is subject to change.

No rights may be derived from the information provided. Past results provide no guarantee for the future. Rabobank and all other providers of information contained in this study and on the websites to which it makes reference accept no liability whatsoever for the content or for information provided on or via the websites.

The use of this publication in whole or in part is permitted only if accompanied by an acknowledgement of the source. The user of the information is responsible for any use of the information. The user is obliged to adhere to changes made by the Rabobank regarding the information’s use. Dutch law applies.

Abbreviations for sources: CBS: Statistics Netherlands, EIU: Economist Intelligence Unit, NIESR: National Institute of Economic Social Research, ONS: Office of National Statistics, OECD: Organisation for Economic Co-operation and Development.

Abbreviations used for countries: SE: Sweden, GB: Great Britain (UK), CZ     : Czech Republic, IE: Ireland, CH: Switzerland, US: United States, HU: Hungary, DE: Germany, IT: Italy, NL: Netherlands, MX: Mexico, ES: Spain, PL: Poland, AT: Austria, IN: India, FR: France, GR: Greece, TR: Turkey, ID: Indonesia, JP: Japan, BR: Brazil, RU      : Russia, CN: China, ZA: South Africa, AU: Australia, BE: Belgium, NZ: New Zealand, CA: Canada, NO: Norway, FI: Finland, DK: Denmark, KR: South Korea, TW: Taiwan, UA: Ukraïne.

Abbreviations used for currencies: try: Turkish new lira, brl: Brazilian real, thb: Thaibaht, rub: Russian rouble, huf: Hungarian forint, zar: South African rand, gbp: British pound, eur: Euro, USD: US dollar.

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Editor: Jill Whittaker

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