Global growth has been slower than desired in the early months of 2014, and as a result, we have seen many analysts—including me—downgrade their forecasts for this year. Indeed, the latest World Bank’s Global Economic Prospects now predicts global GDP growth of 2.8 percent for the year, down from the 3.2 percent forecast in January. Much of that stems from softer growth in the first half of this year in the United States and decelerated activity in the emerging markets. Brazil, Russia and China experienced contracting manufacturing activity levels in May, with only India experiencing modest growth.
The good news is that the global economy is anticipated to pick up in the second half of this year, continuing into next year. The World Bank estimates real GDP growth of 3.4 percent in 2015, with the U.S. economy expanding by 3.0 percent. This would be consistent with the relatively upbeat outlook seen in the most recent National Association of Manufacturers (NAM)/IndustryWeek Survey of Manufacturers. Still, there continue to be threats to growth that could dampen these predictions, including deflationary risks in Europe, tighter monetary policies in the United States and a number of geopolitical struggles. For example, crude oil prices have risen sharply in the past few days to around $107 a barrel this morning because of confrontations in Iraq and worries about energy supplies.
In general, manufacturing activity worldwide continues to expand modestly, but at varying paces across a number of nations. The JPMorgan Global Manufacturing Purchasing Managers’ Index (PMI) increased slightly, up from 51.9 in April to 52.2 in May. Yet, 5 of the top 10 markets for U.S.-manufactured goods had declining levels of activity for the month, up from two in March and zero in December. China tops this list, having experienced its fifth consecutive monthly contraction despite some easing in the pace of the monthly decline. Three of the other four countries with contractions were also in Asia, including Hong Kong, Japan and South Korea. Meanwhile, Brazil has now contracted for two straight months, which is perhaps not the way it wanted to kick off the World Cup. At the other end of the spectrum, we continue to see strong growth in the United Kingdom and the United States, both of which saw heavy production gains in May.
Meanwhile, European economies continue to experience slight expansions, but growth eased in May. The Markit Eurozone Manufacturing PMI decreased from 53.4 to 52.2, its slowest pace since November but the 11th straight month for expanding levels of activity. This resulted from a deceleration in new orders, output, exports and hiring. Nonetheless, growth in the Eurozone remains subpar, with real GDP up just 0.2 percent in the first quarter and expected to increase around 1 percent in 2014 as a whole. Still, retail sales have increased in each of the first four months of 2014, and industrial production increased at its fastest pace since November.
Yet, the big worry in Europe continues to be deflation. Producer prices fell 0.1 percent in the Eurozone in April, with declines of 1.2 percent year-over-year. At the same time, annual inflation has fallen to 0.5 percent. Fears about deflation and slow growth have prompted the European Central Bank (ECB) to take actions to further stimulate the Eurozone economy at its June 5 meeting, cutting its main interest rate to 0.15 percent. In essence, the ECB will charge negative interest rates on bank deposits in an effort to spur institutions to lend more, and there is some speculation that it might pursue a more aggressive asset purchasing program in the future, if needed.
On the policy front, there is an increased focus from both a business and policy perspective on India, with its election of a new prime minister, and Europe, which also elected a new parliament and is constituting a new commission. Trade negotiations in the Asia-Pacific and Europe continue, but work needs to be done on both. Domestically, there is a heavy U.S. focus on the reauthorization of the Export-Import Bank before its expiration on September 30 and passage of a new Miscellaneous Tariff Bill, which has lagged more than 17 months, as well as new legislation on trade secrets.
Chad Moutray is the chief economist, National Association of Manufacturers.