Global economy continues recovery despite bumpy road ahead

2014 is quite a year. The world economy has witnessed faltering growth in the euro area, plummeting oil prices, and flaring geopolitical tensions that posed unforeseen challenges to global recovery.

Looking back, at the beginning of the year, economists had expected a slow and clear takeoff. But data in the first half suggested the takeoff was unsure. In October, the International Monetary Fund called the recovery "disappointing" -- one that is brittle, uneven, and beset by risks.

UNEVEN RECOVERY CONTINUES

In its October World Economic Outlook, the International Monetary Fund (IMF) said global recovery has taken a slower pace than expected in recent years. Citing threats from the legacy of the financial crisis and lower potential growth rate in the medium term, the Fund lowered global growth forecast to 3.3 percent in 2014 and 3.8 percent in 2015.

China and the United States, nevertheless, starred in the lackluster world economy, taking a major share of global growth.

According to Chinese Vice Finance Minister Zhu Guangyao, China's contribution to the world newly-increased GDP would be 27.8 percent in 2014, and the U.S. share would be 15.3, based on the IMF calculation.

China's growth of more than 7 percent over the last year has provided considerable momentum to global aggregate demand, said Uri Dadush, a senior fellow at Carnegie Endowment for International Peace and a former World Bank official.

The IMF predicted China's growth would slow to 7.4 percent this year and 7.1 percent in 2015.

Nathan Sheets, U.S. Treasury's Undersecretary for International Affairs, said the Chinese economy would continue moderate growth in the years ahead, in view of its rebalancing away from exports and investment toward private consumption and household demand.

The U.S. economy is a bright spot in advanced economies in 2014, with a labor market continuing to improve. By November, America had added more jobs in 2014 than in any full calendar year since the late 1990s.

Personal consumption remains robust and inflation expectation remains stable. In view of the strong performance, the Federal Reserve ended the asset purchase program in October, a further step toward monetary policy normalization.

The IMF expects the U.S. economy to grow 2.2 percent in 2014 and accelerate to 3.1 percent in 2015.

Dadush said many factors will propel the global economy forward in 2015, including rapid growth in large parts of the developing world, such as China, India and Indonesia, recovery in the United States and Britain, loose monetary policies, smaller cuts in government spending, and falling oil prices.

"These engines are powerful enough to ensure that we will steer well clear of another global recession," said Dadush.

UNCERTAINTIES LIE AHEAD

Although the world economy will keep recovering next year, the road ahead remains bumpy. According to the IMF, risks to the fragile global recovery come from several sources: increased geopolitical tensions, shocks originating in financial markets, and macroeconomic disappointments in systemically important countries or regions.

Most factors, such as structural deficiencies in the euro area that have weighed on global GDP growth in 2014, will remain in place in the next two years, said Marie Diron, a Moody's senior vice president.

The IMF also warned that major advanced economies, especially the euro zone and Japan, could face an extended period of low growth that could turn into stagnation, with a further adverse impact on potential growth.

Despite supportive financial conditions, the euro area is still a long way from emerging from its debt crisis, and its economic recovery ground to a halt in mid-2014, with inflation below the European Central Bank (ECB) target and unemployment near record high.

Many institutions and economists do not expect any significant rebound in GDP growth in the near term.

According to Moody's latest forecast, the area's economy is expected to grow by 0.9 percent and 1.3 percent in 2015 and 2016 respectively, after 0.7 percent in 2014, less than it previously expected.

European policymakers have taken steps to prop up demand and fend off the risks from persistently low inflation, such as ECB's announcement of significant outright purchases of private assets. But economists widely believed the euro area should do more.

According to economists from the Peterson Institute for International Economics (PIIE), monetary and fiscal policies in the area should more actively work in tandem with productivity-enhancing structural reforms, such as deregulation and deepening the single market, to shift the euro area toward a path of higher growth and stable prices.

Japan is also on the center of concerns. In the country, the recovery in private consumption has been slower than expected and the underlying momentum for private investment is weak.

Its monetary policy has helped lift inflation and inflation expectations, but only monetary policy will not work and it needs to be supported by growth and fiscal reforms to take effect, the IMF says.

Moody's expects the lackluster global demand will act as a drag on Japan's GDP growth, significantly reducing the economic benefits from the weakening of the yen.

The rating agency expects that tighter fiscal policy, including next year's planned second increase in the consumption tax, will curtail domestic demand in the next few years.

However, economic activity will be supported by monetary stimulus, which gives scope to implement fiscal and economic reforms.

The IMF expects the Japanese economy to grow 0.9 percent this year and 0.8 percent next year.