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Disappointing global growth likely for fourth straight year in 2015

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Disappointing global growth likely for fourth straight year in 2015

Persistent uncertainties and new challenges push mirage of "full recovery" further into the distance.

World economic growth, which stands at 3.2% for 2014, will accelerate modestly to 3.4% in 2015, according to a report issued by The Conference Board today.

Overall, annual global growth is projected to average 3.3% from 2015–2019, but could decline to an average of 2.7% in the period 2020–2025 on the basis of the current trend. Long-term growth around 3% is sufficient to sustain a moderate increase in global living standards, but is too low to meet all the future challenges posed by rising middle classes in emerging markets and aging populations in mature economies.

"Optimists are poised to be similarly disappointed in 2015."

"Growth in 2014 met our cautious projections, which were at the low end of analysts' views," said Bart van Ark, Chief Economist of The Conference Board. "Optimists are poised to be similarly disappointed in 2015—and more so as the long-term growth trend dips below 3%. While many in both advanced and emerging economies continue to await a 'full recovery' to pre-crisis growth rates, we believe businesses and policymakers would stand better to focus on managing three key macroeconomic certainties that will define the slowdown in the decade ahead: First, a looming labor shortage; second, a drop in productivity growth; and finally, a lack of investment in productive assets."

Recovery "Bonus" Shrinking for Mature Economies
Across the advanced economies, the Outlook predicts 2.3% growth in 2015, compared to 1.9% in 2014. Growth in the Euro Area should improve to 1.6% from 0.9% in 2014; Europe as a whole is projected to grow 2.0%. This modest spike in recovery is expected to last a few years and is apt to bring European growth somewhat higher—and closer to U.S. levels—than anticipated by the current consensus forecasts. Beyond a brief period of upside potential, however, the long-term picture remains stagnant: The report sees Euro Area growth averaging 1.9% across 2015–2019, before dipping back to 1.2% in 2020–2025.

Meanwhile, U.S. growth is expected to rise from 2.2% in 2014 to 2.6% in 2015. This improvement reflects an economy steadily returning to full capacity—and will be difficult to sustain into the future as the risks of slower productivity growth sink in. In the medium-term, the report expects the U.S. to sustain 2.4% annual growth during 2015–2019, but the long-term trend sees growth slowing to just 1.9% in 2020–2025. In the same two periods, Japan is expected to grow at 1.4% and 1.1%, respectively.

"For much of this decade, forecasters have assumed that mature economies still face a large output gap between their actual production and their potential performance if operating at full capacity," said van Ark. "This offered a recovery 'bonus' that would allow advanced economies to make up what was lost in the recession at growth rates higher than the longer-term trend. While the U.S., Europe, and others will still see some of these effects in 2015 and the following few years, we believe the output gaps have shrunk considerably and any post-recession 'bonus growth' will be relatively small and fleeting."      

Easy Growth Coming to an End in Emerging Economies—and the World 
From the late 1990s until recently, emerging markets have powered the global economy, based on an unprecedented growth differential between emerging and advanced economies. This historical anomaly is fading as many emerging economies are entering a phase in which rapid catch-up growth has come to an end, with the need for serious, long-term, and politically problematic economic reforms coming to the fore. In 2014, positive growth surprises in India and Mexico couldn't offset major disappointments in Brazil and Russia, while China's extended "soft fall" proceeded apace.  

Overall, growth in developing and emerging economies is projected to inch down to 4.7% in 2015, compared to 4.8% in 2014 and 6.2% in 2010–2013. The slowdown will be largely driven by the Chinese economy, for which growth is anticipated to decline further in 2015 to 6.5%, down from 7.3% in 2014. Other large emerging markets will remain stagnant or see slight improvements in 2015, with growth projected at 5.5% in India; 4.3% in the rest of developing Asia; 1.8% in Latin America; and 3.4% in the Middle East and North Africa. Sub-Saharan Africa will see solid growth improvement, from 4.2 to 5.0%, while growth will rebound to a still-anemic 1.4% in Russia, Central Asia, and Southeast Europe. 

Looking further ahead, the medium trend in Chinese growth is projected to fall to an average of 5.5% in 2015–2019 and 3.9% in 2020–2025. (See earlier report: The Long Soft Fall in Chinese Growth.) The corresponding numbers in India are 5.5% and 5.0%, meaning the Indian economy is likely to be growing significantly faster than China's by the beginning of the next decade, making it a potential bright spot and strengthening contender in the global market. Growth throughout 2015–25 should average 3.1% in Brazil and 2.8% in Mexico. By the middle of the 2020s, emerging markets will still substantially outpace advanced economies—growing at an average 3.7% versus 1.8%—but by perhaps the smallest margin in a generation.   

"While the growth contributions from emerging economies are by no means gone, and their growth will continue to be faster than that of mature economies, the significant downshift in their growth trajectories should make us aware that success from the recent past provides no guarantees for the future," explained van Ark. "For the year ahead in particular, the confluence of multiple geopolitical fissures in Eastern Europe, the Middle East,Western Asia, and (to a less urgent extent) the South China Sea make it even less likely that an emerging-market boom will ride to the rescue of global growth, as it has in the recent past."

While the global picture appears downcast, it does offer opportunities for firms and governments with a realistic understanding of the challenges. Ultimately, this decade of slower growth could offer a foundation for overcoming the risk of extended stagnation.        

"At 3% global growth on average," said van Ark, "the next ten years may come to look like the 1980s—a time of modest growth during which structural reforms in many economies facilitated the transition from the old post-World War II 'golden years' to an era driven by the rise of services and new innovations."

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