Former Economics Editor of the NZ Herald

Global growth hits stagnant patch

Widespread slowdown of emerging economies offsets brighter prospects of advanced nations, says OECD.

India's exchange rate has plummeted since May as expectation grows of a dial-back in quantitative easing in the US. Photo / AP
India's exchange rate has plummeted since May as expectation grows of a dial-back in quantitative easing in the US. Photo / AP

The near-term outlook for the global economy is sluggish, the OECD says, as a widespread slowdown in emerging economies offsets brighter prospects for advanced ones.

Based on recent indicators, it expects economic growth in the major advanced economies to continue over the second half of this year at the improved rate seen in the June quarter.

The Group of Seven largest advanced economies is expected to expand at an annualised rate of around 2.4 per cent over the second half of 2013.

"Activity is expanding at encouraging rates in North America, Japan and the United Kingdom, while the euro area as a whole is no longer in recession."

China's growth seemed to have passed its trough, the OECD said, and it was expected to pick up to an annualised pace of around 8 per cent by the end of the year.

"In many emerging economies, however, loss of domestic activity momentum, together with the shift in expectations about the course of monetary policy in the United States and the ensuing rise in global bond yields, have led to significant market instability, rising financing costs, capital outflows and currency depreciations," it said.

"Countries that have relied heavily on portfolio inflows to finance large current account deficits have been most affected."

India, Brazil, South Africa and Indonesia have all seen double-digit percentage falls in their exchange rates since May at the same time as global long-term interest rates have risen, triggered by the prospective withdrawal of additional quantitative easing measures in the United States in the light of growing evidence the US economy is strengthening.

"As emerging economies contributed the bulk of global economic growth in recent years, and since their share of global output has increased so much, this widespread loss of momentum makes for sluggish near-term growth prospects for the world economy."

One of the risks to the global outlook the OECD saw was that strong capital outflows from, and financial market volatility within, some emerging markets could intensify.

Another risk is posed by unresolved debt issues in the eurozone.

"Many euro area banks are insufficiently capitalised and weighed down by bad loans."

The third risk the OECD cited was renewed deadlock and brinkmanhip over fiscal policy in the United States, which it said had the potential for seriously negative consequences. "Failure to reach agreement on a timely basis on raising the federal Government's debt ceiling, which would be reached in October, or on an appropriation for 2014 or a continuing resolution, could lead to disruptions in government spending and trigger adverse reactions in financial markets or weaken confidence."

- NZ Herald

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