Gisma Globalization & Economic Development

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Japan’s economy still struggles with a sales tax increase which lowered the consumption and demand of households. Furthermore exports remained weak due to lower global demand, relocation of production facilities to overseas countries and rising costs of energy imports resulting from the shutdown of nuclear power plants. Unemployment is low, but labor force participation remains below pre-crisis levels and real wage growth is subdued. The quantitative easing program (e.g. purchase of bonds) of the Japanese central bank prevents a slowdown in inflation. The Japanese government started product and labor market reforms (in line with OECD recommendations).[8]

China still grows at a stable pace but faces gradual deceleration in growth rates mainly resulting from China’s transition to a consumption-driven economy. Furthermore China is facing growth rates between 7.0 and 7.5% in 2014, which are significantly below the past rates of up to 10%, however according to the current five-year plan. China has adopted measures aimed at containing financial vulnerabilities and unwinding excess capacity (in construction, shipping, and renewable energy sectors) and preventing a significant slowdown. To achieve the growth targets the government has started to implement certain stimulus measures, e.g. support for new public infrastructure and housing projects, tax relief to small and medium-sized enterprises and targeted cuts in the banks’ required reserves.[9]

Growth in many emerging market economies did not match expectations in 2014 due several reasons, e.g. export weakness, policy and electoral uncertainty, social and labor tensions and slow progress in structural reforms. Furthermore international prices for primary commodities showed a downward trend over the last two years (see annex 4), especially the oil price decreased remarkably. International trade decelerated mainly to the slow and uneven recovery of the developed countries and slow growth of the developing countries, however the international trade rate expanded by 3.4% in 2014.[10] The largest 20 developing countries (accounting for one-fourth of global GDP) suffered from stagnating or declining commodity prices and the change of monetary polices in US resulting in further instability and worse credit access conditions. [11]

Growth rates of economies in Latin America and the Commonwealth of Independent States (CIS) decelerated due to different challenges, e.g. infrastructural bottlenecks, ineffective macroeconomic management and (geo-) political tensions (especially in Brazil and between the Ukraine and Russian Federation).[12]

Growth in North Africa countries recovered to 1.2% in 2014. Regional tensions and weak eternal demand marked the past months, however improvements in confidence due to progress on the political transition (e.g. in Egypt, Tunisia), manufacturing and exports (e.g. Egypt, Morocco), as well as a bottoming out of oil production, contributed to the acceleration in growth. However this slight upward trend remains fragile and output is still below the region’s potential as structural reforms and policies are not yet available to facilitate growth, reduce unemployment and poverty. Security challenges in several countries are a key factor of instability and risk for regional GDP (Iraq, Jordan, Lebanon, Libya, Syrian Arab Republic, Republic of Yemen)[13] Growth in Sub-Saharan Africa reached 4.5% in 2014. Growth in South Africa slowed significantly due to mining strikes, electricity shortages and less investor confidence. Main growth drivers were investment in public infrastructure, increased agriculture production and service sector expansion (transport, telecommunication, financial services). Infrastructure investment (e.g. in ports, electricity capacity, and transportation) and increased agricultural production across the region supported to sustain the growth. The fiscal deficit for the region narrowed to 2.5 percent of GDP, as several countries took measures in 2014 to control expenditures. [14]

As domestic and global demand has been weak, the level of (private) investments has been on a low level, which hindered growth of employment rate, wages and consumption. Therefore the growth of potential output level on the supply side also remained low resulting in low-level supply-demand equilibrium environment.[15]

Employment remains as a major challenge as the global employment rate has grown by 1.4% in 2014 but stays below the 1.7% in pre-crisis years. The developed countries could not sufficiently recover the job situation from the financial crisis. Main reasons are weak labor demand, structural factors and lower labor force participation. However there is a great divergence in employment rates of developed countries as the unemployment rate in US declined (below 6%) while some countries in the Euro area struggle with high unemployment rates (especially youth unemployment). Furthermore long-term unemployment is on record high and has become a more serious issue.

In developing countries the employment growth slowed, however in some countries the employment rates in 2014 were higher than in 2007 before the crisis (e.g. in Argentina, Brazil, Indonesia and Turkey). The deceleration of employment growth could be explained with the population ageing and younger population enrolling in longer education programs. Higher unemployment rates are recorded in Africa and Asia, however rates are difficult to measure especially in the informal sector. In Middle East, North Africa, South Asia, and Eastern and Central Europe unemployment increased or remained high.[16] Wage growth has almost stagnated, especially in countries that tightened monetary policy (e.g. Indonesia) or suffered sharp contractions (e.g. Ukraine).[17]

Global inflation remains subdued. While the inflation rate of developed countries slightly increased from 1.3% in 2013 to 1.5% in 2014, the inflation rate in the Euro area decreased to 0.7% and some countries faces the risk of a deflation. The inflation rate growth in developing countries slowed down and inflation rate partly decreased due to the decline in commodity prices and tightened macroeconomic policies, however the rates stay above the 5% level.[18]

The most noticeable development on the foreign exchange market is the substantial appreciation of the US dollar against most of the major currencies of developed countries (e.g. euro an yen) and against the currencies of developing countries. Reasons are the economic improvements, ending of the FED’s quantitative easing program and the expectation that interest rates will increase in 2015. Only the Chinese renminbi could appreciate against the dollar in 2014.[19]

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Commodity

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