Global economy predicted to grow 3.7% in 2014-2015

LONDON, Feb. 8 (PNA/Xinhua) — London economics think-tank the National Institute of Economic and Social Research (NIESR) Friday forecast that the world economy would grow by 3.7 percent in 2014 and 2015.

Angus Armstrong, director of macro-economic policy at NIESR, said, “We expect world growth to pick up to 3.7 percent this year and next year, which is an improvement on 2013′s 3.1 percent.”

Armstrong said this was an improvement on recent years but he characterized it as “moderate and uneven” and “sluggish by past historical standards.”

A lot of the issues of concern about the world economy remained.

Growth prospects have improved in advanced economies, particularly in the U.S., but have deteriorated in a number of emerging market economies.

Armstrong said emerging markets now represented about 40 percent of world output on PPP basis, and problems in nations like Indonesia, Russia, and Argentina could have an impact elsewhere. “The key issue will be the feedback effect this has on the rest of the world economy,” Armstrong said.

Armstrong said that he expected unemployment rates to remain high, with a simple average of unemployment in the nations covered by NIESR at 9.6 percent.

“This is extraordinarily high,” said Armstrong, “especially after two years of reasonable expansion.”

The corollary of that is that there are still under-utilized resources, and downward pressures on inflation. “On a world level, inflation will be at or below inflation targets,” said Armstrong.

Armstrong said the adjustment in the euro area would be more balanced and less costly if inflation were at its target on average (currently 0.7 percent against a target of 2.0 percent), and above average in the core countries. “Inflation of 0.7 percent makes it hard for countries in southern Europe to regain competitiveness,” he said.

With the exception of the U.S., there has been only a small reduction in private sector debt burdens, and this adjustment would be considerably more difficult in a deflationary environment, said Armstrong.

Better growth, very low borrowing costs and little pricing power in goods markets may lead to further appreciation of asset prices, he said and this could complicate monetary policy stances and the associated forward guidance.

In addition, a deflationary environment made monetary policy very complicated.

“Central banks only control a small part of monetary conditions, the central bank balance sheet. What is more important is the behavior of the banking systems,” Armstrong said.

Very low repo rates in the euro area had not translated into a wider stimulus for the economy, he said.(PNA/Xinhua)