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Globalization & Monetary Policy Institute
International Economic Update

Advanced Economies Crawling Back, Emerging Economies Slowing Down

November 1, 2013 · Update in PDF PDF

Advanced economies are expected to continue to gradually regain ground, while growth in emerging economies is cooling down (Chart 1). Asset prices have risen substantially in many emerging economies since the global financial recession in 2008, and some have begun to experience a reversal, posing a challenge for policymakers as the slowdown continues.

The 2013 International Monetary Fund (IMF) forecast for output growth in emerging economies now stands at the lowest level in the last 10 years, except for 2009. In its October World Economic Outlook, the IMF revised the forecast down from 5 percent to 4.5 percent. Given this slow global growth, inflation is expected to remain subdued. Fiscal and monetary policies are starting to take hold in some advanced economies, though the euro-area recovery remains anemic and uneven. Growth from advanced countries has helped compensate for the slowdown in emerging economies this year.

Forecasts Revised Down, but China on Course to Meet Target

China’s economic growth has dropped over the past two years. The IMF revised the nation’s 2013 growth forecast down from 7.8 percent to 7.6, still above the government’s 7.5 percent target. The IMF revised its 2014 forecast down from 7.7 percent to 7.3. However, year-over-year growth increased to 7.8 percent in the third quarter (Chart 2). The latest Purchasing Managers Index (PMI) data point to improvements as well.

Consumer price index (CPI) inflation increased to 3.1 percent year over year from 2.6 percent in August, below China’s annual goal of 3.5 percent. The rise is partly due to increased food prices after Typhoon Usagi hit southern China in late September. Policy rates from the People’s Bank of China are expected to remain unchanged.

While inflation remains relatively tame, house prices have soared in 2013. September house prices in China’s four largest cities were up between 16 percent and 20 percent year over year (Chart 3). The government has already imposed restrictions on mortgages and the number of homes a person can buy. Further policies to contain the real estate appreciation and demand-fueled house price inflation and to improve access to housing may be in the works. Tightening credit, however, could curb China’s economic growth in fourth quarter 2013.

Other Emerging Economies Face Challenges

Growth prospects in other emerging economies have weakened in recent months. Many have seen rapid increases in asset prices and large capital inflows over the past few years. These countries may have to wade through notable asset price corrections if market expectations change. Stock price indexes in Asia, which had risen substantially the past few years, have fallen in recent months (Chart 4).

While output growth in Brazil is below trend (3.3 percent year over year in second quarter 2013) and the current account deficit is widening, rising prices are still a problem. The Bank of Brazil raised its policy rate by 50 basis points to 9.5 percent at its October meeting to try to subdue inflation, which came in at 5.8 percent in September.

Mexico’s prices are also rising, but the Bank of Mexico cut its policy rate by 25 basis points to 3.75 percent to try to spur economic growth. Mexico’s real gross domestic product fell 0.74 percent quarter-over-quarter in the second quarter, the biggest decrease in the past 10 years outside the 2008 global financial crisis.

Euro-Area Economic Improvements Spread Unevenly

Recent euro-area data suggest that the region’s economy has probably bottomed out. The level of economic improvement differs across member countries, though. For example, Germany’s unemployment rate of 5.2 is the lowest it has been in over 20 years, while the rest of the euro area has seen high unemployment (Chart 5). Jobless rates in Italy, Greece and France are at 20-year peaks.

Spain’s unemployment rate held steady in September after reaching 26.6 percent in August. However, the Spanish government forecasts a decline to 25.9 percent in 2014. Spain’s economy grew 0.1 percent quarter-over-quarter in the third quarter after nine quarters of contraction.

The euro area’s uneven economic recovery creates difficulties for monetary policy in the region. In spite of that, inflation remains low, and the European Central Bank’s accommodative policy is expected to persist in the near future.

Japan’s Stimulative Policies Start to Take Hold

Japan’s government and central bank have implemented fiscal stimulus and monetary easing policies in an attempt to increase inflation. Since Shinzo Abe assumed office in December 2012, the Nikkei stock index has increased 46 percent, and the yen has depreciated 14 percent against the currencies of Japan’s bilateral trading partners.[1]

Both headline and core inflation (which excludes prices for fresh food and energy) have been rising since monetary easing was implemented in April (Chart 6). Energy has driven the headline increase—Japan imports much of its energy and must do so with a depreciated yen. However, the weaker yen has made Japan’s exports cheaper as Abe tries to boost economic growth.

—Valerie Grossman

  1. Known as the real effective exchange rate, the calculation from J.P. Morgan is trade weighted and deflated by Japan’s Corporate Goods Price Index.
About the Author

Grossman is a research assistant in the Globalization and Monetary Policy Institute at the Federal Reserve Bank of Dallas.


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