In the US a confluence of negative factors resulted in a sharp contraction of GDP in the first quarter of the year and while we expect a rebound, 2014 growth appears likely to come in below 2013. In the Euro area growth continues to fail to gain any significant traction and make any dent in spare capacity. Recent events in Portugal highlight the risk of complacency about the significant amount of work still required to put the economy on a firmer footing.
Japan is moving through the volatility created by the recent consumption tax hike. We remain less than optimistic about the extent to which the economy will recover in the second half of the year given the decline in real incomes. Some progress has been made on structural reform but it appears to us to still be insufficient to boost longer term potential growth in any meaningful way.
Sentiment has improved in the key emerging economies. Growth in China appears to be stabilizing and current account deficits of the so-called ‘fragile five’ are at least stabilizing and in most cases improving following an abrupt adjustment process.
We continue to expect global growth will be stronger in 2014 than 2013, although the margin of that improvement has reduced since our last report, largely on the back of a weak start to the year in the US. Global growth is forecast to come in at 3.3% this year, up from 3.0% in 2013 but lower than the 3.5% we were forecasting in April. We expect further recovery over the next two years with growth of 3.7% expected in 2015 and 3.9% in 2016.
For the full story from the July issue of Quarterly Strategic Outlook, including asset class commentary from our Head of Investment Strategy Keith Poore, click here.