‘This Time is Different’. This statement, the title
of a much cited study on financial crises by
Reinhart and Rogoff, also arguably best describes
the current phase of the global economy. It is
different in the sense that the US has moved centre
stage again in the global economy as the Eurozone’s
Two recent events have shaped this shift in focus.
Firstly, the announcement by Federal Reserve (Fed)
chairman Ben Bernanke on 22 May, that the US will
‘taper’ its expansionary monetary policy, sent a
shockwave through the global financial system. US
government bond yields went up, as did those of
Germany, while the exchange rates of the currencies
of a number of emerging economies - notably India,
Indonesia and Turkey - depreciated considerably as
capital moved back to advance economies.
Although the turmoil has now receded, this episode
served as a wake up call for emerging economies to
address structural weaknesses if they are to
maintain their current growth levels. And it warned
the US that its monetary policy needs to be scaled
back at some point as the economy continues on its
path to recovery.
Secondly, political deadlock in the US between the
Republicans and Democrats continued to weigh on
fiscal policy and the economy. In early 2013, an
agreement was struck on automatic spending cuts:
this has limited economic growth by about one
percent this year. In October the government was
temporarily shut down, again harming the economy.
In the same month a threatened default on US
treasury bonds which would have had major global
implications, was narrowly avoided by ‘kicking the
can’ down the road towards early 2014.
Meanwhile in the Eurozone, as calmness in the
financial markets continued to reign, on the back of
the implicit European Central Bank (ECB) guarantee
not to allow a break up, politicians were able to
make significant progress towards a European
banking union in June. The mood has clearly
changed, as demonstrated by much improved
confidence indicators. Even better, the economy has
now turned a corner by growing in the second
quarter: at least one quarter ahead of expectations.
Although much remains to be done on the policy
front and the recovery is still fragile, there is a
feeling that the Eurozone crisis is fading.
This different picture is reflected in our forecasts for
2014, which have changed since those we made in
our May Economic Outlook. Global growth for 2014
will be almost unchanged at 3.1%, as will the
modest Eurozone growth of 0.9% and, despite the
fiscal woes, a healthy 2.6% growth in the US. But
for the emerging economies forecasts are lower: at
4.7% for Asia Pacific and 3.3% for Latin America.
The gap in growth between advanced and emerging
economies is no longer widening – that too is