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The world economy remains adrift in choppy Waters (Foda & Prasad)

The world economy remains adrift in choppy Waters by Karim Foda and Eswar Prasad published by Brookings (10/2015).

“The latest update of the Brookings-Financial Times TIGER (Tracking Indexes for the Global Economic Recovery) reveals sharp divergences in growth prospects between the advanced economies and emerging markets, and within these groups as well.

Growth prospects for the advanced economies have improved, but this is largely on account of good growth in the U.S. and the U.K. The euro zone remains mired in low growth and Japan’s economy appears to have stalled again. Commodity-exporting countries, both advanced and emerging, have been hit by sharp growth slowdowns.

The U.S. economy continues to strengthen, with domestic demand picking up momentum, as reflected in rising retail sales and investment. Despite healthy employment growth and a falling unemployment rate, wage pressures remain muted. Inflation has stayed low, aided by a strong dollar and weak energy prices, and the CPI index has flirted on and off with deflation. Credit growth remains robust but U.S. equity markets, industrial production, and exports have all been held back by economic weakness in the rest of the world. The strong possibility that the Federal Reserve will commence its rate hike cycle in December points to how asynchronous the U.S. recovery is relative to business cycle conditions in most other advanced economies.

The euro zone and Japan face a difficult combination of weak growth, near-deflationary price changes, and the absence of fundamental reforms needed to revive domestic demand. Any growth at all in the euro zone is considered a victory and the zone has certainly kept to those expectations, growing at less than half a percent in the second quarter. The Japanese economy contracted in the second quarter. Despite highly expansionary monetary policies, inflation in both economies is barely positive…”  

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