Unedited United Nations Department of Economic and Social Affairs LINK Global Economic Outlook 2015-2016 New York October 2014 1 Acknowledgements This report presents the short-term prospects for the global economy in 2015-2016, including major risks and policy challenges. The report draws on the analysis of staff in the Global Economic Monitoring Unit (GEMU) of the Development Policy and Analysis Division (DPAD), United Nations Department of Economic and Social Affairs (DESA), and on inputs from the experts of Project LINK. The regional outlooks include inputs provided by the UN Regional Commissions (ESCAP, ESCWA, ECA, ECE and ECLAC). UNCTAD provided input to the section on commodity prices. The current report was coordinated by Matthias Kempf, with contributions from Grigor Agabekian, Clive Altshuler, Hung-Yi Li, Ingo Pitterle, Hamid Rashid, Sebastian Vergara, Sergio Vieira and John Winkel. Cordelia Gow and Ann D’Lima provided statistical and editorial assistance. The interns Sha Miao, Jeremy Yu and Fabio Haufler also made contributions. Pingfan Hong provided general guidance. This report is prepared for the UN DESA Expert Group Meeting on the World Economy (Project LINK) to be held on 22-24 October 2014 in New York. The views expressed herein do not necessarily represent those of the United Nations or its Member States. 2 Contents Overview................................................................................................................................................4 I. Global macroeconomic prospects ..........................................................................................6 I.1. Global growth prospects..............................................................................................................6 I.2. Employment trends....................................................................................................................12 I.3. Inflation outlook ........................................................................................................................16 I.4. International prices of primary commodities ...........................................................................17 I.5. International trade flows............................................................................................................19 I.6. International capital inflows to emerging economies ..............................................................20 I.7. Exchange rates...........................................................................................................................22 I.8. Global imbalances .....................................................................................................................24 II. Prospects by regions ..............................................................................................................26 II.1. Developed economies ...............................................................................................................26 II.2. Economies in transition.............................................................................................................41 II.3. Developing economies ..............................................................................................................46 III. Global risks and uncertainties..............................................................................................63 III.1. Risks associated with the QE exit and the normalisation of interest rates by the Fed .............63 III.2. Remaining fragilities in the euro area....................................................................................64 III.3. Vulnerability in emerging-market economies .......................................................................64 III.4. Geopolitical tensions and risks...............................................................................................67 IV. Policy challenges.....................................................................................................................68 IV.1. Fiscal policy stance.................................................................................................................68 IV.2. Monetary policy stance ..........................................................................................................70 IV.3. Challenges in managing the normalisation of monetary policy ...........................................72 IV.4. Policy challenges for strengthening employment and improving working conditions........73 IV.5. Development in international trade policies..........................................................................75 IV.6. International policy coordination...........................................................................................75 Statistical annex tables 3 Overview The world economy continues to grow at a moderate and uneven pace, encumbered by both the legacies of the global financial crisis and a number of new challenges. The global growth is projected to strengthen in 2015-2016, to a pace of 3.1 per cent and 3.4 per cent, respectively, up from the estimated rate of 2.6 per cent in 2014. This forecast is, however, subject to significant uncertainties and risks. Six years through the aftermath of the global financial crisis, the majority of both developed and developing countries are seeing their GDP growth on a markedly lower path than they were prior to the crisis. While developed economies have indeed in 2014 all registered positive growth for the first time since 2011, growth in the euro area remains fragile and the momentum in Japan is also tapering off. Among developing countries and economies in transition, it is worrisome to see a sharp deceleration in a number of large emerging economies, particularly in Latin America and the Commonwealth of Independent States. A number of these economies continue to face various country-specific challenges, including structural imbalances, infrastructural bottlenecks, increased financial risks, incoherent macroeconomic management as well as geopolitical and political tensions. Insufficient jobs remain a key policy concern worldwide, as the unemployment rates, particularly for youth, are still elevated in a large number of both developed and developing countries. The global inflation outlook remains benign, although a dozen of developing countries and economies in transition are challenged by high inflation while some European economies may face the risk of deflation. International trade flows continue to expand at a lacklustre rate, while progress in the WTO multilateral trade negotiations remains sluggish, preventing any new impetus to boost the global dynamism in trade and output. At the same time, the international prices of primary commodities are on a downward trend. International capital flows to emerging economies are also moderating. Major uncertainties and risks threatening the world economic outlook include the risks associated with the QE exit and the normalization of interest rates by the United States Federal Reserve, along with the divergence in monetary policies among the major developed countries; remaining fragility in both the financial sector and the real economy in the euro area; vulnerability in emerging economies to both the external shocks and domestic structural bottlenecks; a possible escalation in geopolitical tensions; and the risk of a failure in containing Ebola. Macroeconomic policies worldwide are challenged to place the global economy on a more robust and balanced growth trajectory. In developed countries, the almost exclusive reliance on monetary policy is unlikely to achieve the multi-dimensional goals of robust growth, full employment, price stability and financial stability. In many developing countries, the policy space, as well as policy instruments, may not be sufficient to tackle the external vulnerabilities and domestic structural challenges. Therefore, coordination is needed within both developed and developing countries among different policies and structural reform measures. 4 At the international level, policy coordination and cooperation are also imperative in many areas, including aligning macroeconomic policies worldwide towards the focus on supporting growth and jobs; mitigating adverse international policy spill-overs; furthering financial regulatory reforms; forging progress towards the completion in the WTO Doha Round; enhancing cross-border tax cooperation; providing sufficient resources to the LDCs; and ensuring a smooth transition in global development cooperation from the Millennium Development Goals to the Sustainable Development Goals as the post-2015 development policy framework. 5 I. Global macroeconomic prospects I.1. Global growth prospects The global economy continued to expand during 2014 at a moderate and uneven pace, as the prolonged recovery process from the global financial crisis was still saddled with the unfinished post-crisis adjustments. The global recovery was also exacerbated by some new challenges, including a number of unexpected shocks, such as the heightened geopolitical conflicts in different parts of the world and the most recent eruption of the Ebola pandemic. Growth of world gross product (WGP) is estimated to be 2.6 per cent in 2014, marginally better than the growth of 2.4 per cent registered in 2013, but lower than the 2.9 per cent projected in the previous LINK Global Economic Outlook of June 2014.1 In the outlook, premised on a set of assumptions (box 1) and subject to a number of uncertainties