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Assessment of The Global Economy

Source: OPEC_RP140302 3/12/2014, Location: Europe

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The assumption that the global economy will see a gradual recovery in 2014, led by growth acceleration in the major OECD economies, remains valid. This is despite softening economic indicators at the beginning of the year, particularly in the US and China, which have highlighted some fragility in the on-going momentum. However, some of this might be explained by temporary factors such as the extremely cold weather in the US and reduced economic activity due to the Chinese New Year holiday. Additionally, anticipation of a sales tax increase in Japan, the on-going challenges in domestic consumption in Brazil, and recent developments in Ukraine have added to this year’s growth risk. On the positive side, the recovery in the Euro-zone, although gradual, seems to be on track and India’s economy also appears to continue recovering from the low growth levels seen in the past year.

The global economy is expected to rebound from last year’s GDP growth of 2.9% to 3.5% in 2014, unchanged from the initial forecast. OECD economies will contribute most of the increase, with growth improving from 1.3% in 2013 to 2.0% in 2014. As the underlying growth dynamic gained traction in the US in the second half of 2013 and an agreement on fiscal issues has been achieved, US GDP growth is now forecast at 2.7% this year, compared to 1.9% in 2013. Equally important for the OECD’s recovery is the rebound in the Euro-zone. The most pressing sovereign debt issues in the peripheral economies have been overcome and supportive measures for some vulnerable parts of the banking system make it more likely that the region will reach growth of 0.8% this year, following last year’s contraction of 0.4%. In Japan, stimulus efforts had a positive impact on GDP growth in 2013 and some of this momentum is expected to continue into the current year, although the effect of the April sales tax increase remains uncertain. Growth is expected at 1.5%, slightly lower than the 1.6% seen in the previous year.

China is now forecast to expand at 7.6% in 2014, almost at the same level as in the past year. China recently announced its growth target of 7.5%. Achieving this target will depend on balancing growth requirements with efforts to enact planned reforms, particularly in the financial sector. India is on the path of recovery from relatively low growth in 2013 and is forecast to grow by 5.6% in the current year, with most recent indicators confirming this forecast. The Russian economy is expected to see 1.9% growth this year, although recent developments have highlighted several uncertainties.

This rising risk of a slowdown in growth in the emerging economies has been mirrored in the foreign exchange markets in recent months. This has been partly triggered by the US Fed’s tapering of monetary stimulus, leading to a reassessment of emerging market fundamentals, which resulted in an outflow of foreign investment. With expectation of a further reduction of US monetary stimulus and a more accommodative approach by central banks in Europe and Japan, a likely appreciation in the US dollar may impact commodity markets globally.

While many challenges remain, the expected improvement in the global economy is also resulting in higher oil demand as growth in global oil consumption is forecast at 1.1 mb/d in the current year compared to 1.0 mb/d in 2013. In light of the prevailing uncertainties, a key determinant for this increase in world oil demand will be the pace of growth in the emerging economies.

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