The new year has begun with improving fundamentals in many economies, supported by a heavy dose of policy stimulus. The euro crisis is less acute, investors are more adventurous and the industrial cycle is beginning to turn upwards in bellwether emerging markets. As a result, the Economist Intelligence Unit believes that the outlook for global growth is improving. Gains will take some months to materialize, given the overhang from problems in 2012, but we anticipate a noticeable acceleration in economic activity from mid-2013. We forecast that world GDP will grow by 3.3 percent at purchasing power parity (PPP) exchange rates in 2013, equivalent to growth of 2.3 percent at market exchange rates. This is better than last year, although still exceptionally weak at such an advanced stage in an economic recovery. All the same, this apparently subdued picture masks more positive underlying developments.
Fiscal drag continues in developed world
The .U.S economy will be held back by sharper fiscal consolidation this year. Congress was able to avoid the "fiscal cliff" -- a sharp fiscal consolidation at the start of 2013, which threatened to push the economy back into recession. Nonetheless, taxes are set to rise on workers (a temporary payroll tax cut was not extended) and high incomes will be taxed more heavily. Planned spending cuts for this year may be moderated, but will still take effect. As a result, we expect consumption and investment to be dampened in the first half of the year. These effects should be mostly over by mid-year, however, as recoveries in the labor and housing markets become better established. We forecast a pick-up in the second half of the year to carry over into 2014.
In Europe, the ECB's new (albeit unused) sovereign bond-buying program has now provided the longest period of financial calm since the eurozone debt crisis began in late 2009. By contrast, the crisis continues in the real economy. Unemployment in the currency union as a whole reached a record high of almost 12 percent in November (the rate remains much higher in struggling peripheral member states). GDP is set to contract mildly for a second successive year in 2013 as budgets are tightened to make up for missed fiscal targets in 2012. However, core economies such as Germany will show some resilience, and external demand should pick up after a soft 2012.
A new addition to this picture of improvement is the prospect of stronger-than-expected Japanese growth. This is thanks to a new government that is committed to more aggressive stimulus. The new prime minister, Shinzō Abe, has also pushed the Bank of Japan (BOJ) towards much looser monetary policy. The yen has devaluated substantially in the past three months, and this should support Japanese export competitiveness.
Emerging markets benefit from Asia upswing
Prospects for emerging-market regions are mixed in 2013, but we expect growth in Asia to pick up. China will lead the way, with GDP growth accelerating to 8.5 percent on average for the year as the effects of earlier stimulus increasingly flow through into the economy. Recent industrial production and export data have been encouraging, while earlier worries that political factionalism ahead of a tricky leadership transition would disrupt the economy seem to have proven unfounded. China's recovery will support GDP growth in Asia and Australasia in 2013, although India will disappoint again. Latin America suffered a slowdown last year, but we still believe that the downturn was cyclical rather than structural, and we expect growth to pick up to 3.6 percent in 2013. The upturn will draw on an expected improvement in the Brazilian economy, and by stronger growth in China, which will benefit commodity producers.
Growth will be flat, at 2.6 percent, in the transition economies of eastern Europe in 2013. The region continues to feel the effects of the troubles in the euro zone, its most important market and source of investment. However, we expect conditions to improve as the year progresses, given our assumption that the situation in the euro zone will stabilize. Growth in the Middle East and North Africa (MENA) will be constrained in 2013 by a further contraction in Iran's economy. We expect Iranian oil production to decline again, and sanctions are also hampering non-oil economic activity. However, high oil prices and expansionary fiscal policies will sustain strong rates of growth in Saudi Arabia and the Gulf States. Average GDP growth for the MENA region is forecast to slow slightly to 3.4 percent this year, before accelerating to 4.3 percent in 2014. Sub-Saharan Africa, meanwhile, will see a pick-up in growth to 4.5 percent this year and 5 percent in 2014. Oil exporters such as Angola, Cameroon, Chad, Equatorial Guinea and Ghana will benefit from rising hydrocarbons output. New mining production and Chinese investment inflows will also be positive for growth.