1. Page 1 of 2
Economic Commentary
QNB Economics
economics@qnb.com.qa
August 10, 2014
The Global Economy Continues to Stumble Along
The global economy continues to stumble
along. According to the latest IMF World
Economic Outlook (WEO) published on July 24,
global economic growth slowed to an annual
rate of 2.7% in Q1 2014, well below the 3.6%
registered in the previous quarter. Part of the
slowdown was due to a temporary contraction
in the US and slower growth in the Eurozone,
China and Emerging Markets (EMs) in Q1.
However, both the US and China rebounded in
the second quarter. Notwithstanding these
temporary factors, the ongoing global
investment slowdown reflects increased
uncertainty about the impact of an eventual
rise in US interest rates and rising geopolitical
risks. Looking ahead, the global economy is
likely to continue to stumble along unless
these clouds are lifted from the investment
horizon.
Global economic growth in Q1 2014 was
weaker than expected for a number of factors.
First, the US registered the largest contraction
(-2.1%) since Q2 2009, reflecting an inventory
overhang and unusually cold weather. While
this contraction was reversed in Q2 2014
(4.0%), US growth for the first half of the year
as a whole was still relatively weak (0.9%) on
weak investment spending. Looking ahead, we
expect US growth of only 1.0%-1.5% for 2014
as a whole as expectations of an eventual rise
in US short-term rates weighs negatively on
investor sentiments.
Second, growth in the Eurozone was barely
positive (0.2%), reflecting stronger economic
activity in Germany and Spain offset by
virtually no growth in France and Italy (see
QNB Group’s Economic Commentary dated
May 25, 2014). The Ukraine crisis has added
Latest QNB Group Growth Forecasts
(Real GDP growth rates, % change)
Sources: IMF estimates and QNB Group forecasts
downside risks to the Eurozone, given its
energy dependence on Russian gas. We
therefore expect Eurozone growth to reach
only 1% in 2014.
Third, Chinese growth was somewhat lower
than expected (7.4%) in Q1 on a slowdown in
private demand following a tightening of
domestic monetary conditions in the second
half of 2013 (see QNB Group’s China Economic
Insight 2014 report for details). In response,
the government passed another stimulus
package, including tax breaks for small- and
medium-size enterprises and an acceleration of
infrastructure spending. This stabilized
growth at 7.5% in Q2 in line with the
authorities’ target for year as a whole. We
expect this target to be met on the strength of
the government’s stimulus package like in
2013, but private sector consumption and
investment are likely to slow further.
Fourth, EM economic activity continued to
slow, following the announcement of the Fed’s
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2. Page 2 of 2
Economic Commentary
QNB Economics
economics@qnb.com.qa
August 10, 2014
intention to taper Quantitative Easing in May
2013 and the consequent tightening of
financial conditions. Growth in Brazil virtually
stalled (0.2%) in Q1 on tight monetary policy
and political uncertainty. India’s growth rate
was temporarily boosted by election spending
in Q1, but the new Modi administration faces
significant structural challenges to reignite
India’s growth momentum. The same can be
said for the new Jokowi administration in
Indonesia (see QNB Group’s Economic
Commentary dated July 26, 2014). Russia and
South Africa’s economies contracted in Q1 on
the Ukraine crisis for the former and labor
disputes for the latter. Overall, we expect EM
growth to be weak in 2014 (3.0%) on
continued economic and geopolitical
uncertainty weighing on investment
decisions.
Looking ahead, uncertainty about the timing
of higher US interest rates and geopolitical
risks are likely to continue to weigh heavily on
the prospects for the global economy. The
global investment slowdown is partly due to
the end of Quantitative Easing, where super-
cheap money led to large flows of capital to
EMs and risky assets. The eventual increase in
US interest rate will inevitably lead to a
reassessment of investment decisions and the
price of certain asset classes.
The conflicts in Iraq, Libya, Palestine and
Ukraine add significant geopolitical risks to
this already weak outlook. Large disruptions to
gas supplies in Eastern Europe or oil supplies in
Libya and Iraq could put upward pressure on
gas and oil prices and further dampen global
economic growth.
Overall, the outlook for the global economy
remains uneven and risks are tilted heavily on
the downside. The eventual rise in US interest
rates and geopolitical risks emanating from the
conflicts in Eastern Europe and the Middle East
are only likely to add to the global investment
slowdown. As a result, the global economy is
only likely to continue to stumble along until
these clouds are lifted from the investment
horizon.
Contacts
Joannes Mongardini
Head of Economics
Tel. (+974) 4453-4412
Rory Fyfe
Senior Economist
Tel. (+974) 4453-4643
Ehsan Khoman
Economist
Tel. (+974) 4453-4423
Hamda Al-Thani
Economist
Tel. (+974) 4453-4646
Ziad Daoud
Economist
Tel. (+974) 4453-4642
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