In the United States, the economy is projected to expand 2.1 percent in 2014, up from 1.9 percent in 2013. The first quarter contraction will weigh on the annual number — even as quarterly growth rebounds to close to 3 percent, responding to a reduced drag from fiscal consolidation, improving labor market conditions and an upturn in investment spending, which had been held back in recent years by an uncertain fiscal policy climate. Together these factors are expected to lift growth further to 3.0 percent or thereabouts in 2015 and 2016.
In the Euro Area, reduced fiscal drag is also projected to support an acceleration in activity from -0.4 percent last year to 1.1 percent in 2014 — the first annual increase in three years. In subsequent years growth is projected to firm further—reaching 1.9 percent in 2016. The recovery will be supported by positive reform momentum (including the establishment of a single supervisor and broad based backstops), and the gradual establishment of a virtuous cycle of rising confidence, improving asset values, employment and strengthening private demand.
Activity should also remain supported by a further easing of the monetary policy stance — baseline projections factor in the cut in policy rates by the ECB in June through a lowering of short term interest rate projections by some 30 basis points in 2015 and 2016, relative to projections in the January 2014 GEP and also anticipates that low spreads in the periphery economies will persist. Credit easing and other unconventional measures announced in early June are not factored in the baseline and can therefore be considered as an upside risk to the projections. Policy is not expected to tighten until deflation fears have been firmly laid to rest and there are signs of a well-entrenched recovery.
Japan is the only major developed economy expected to slow down this year (to 1.3 percent compared with 1.5 percent in 2013), partly because the growth impetus from monetary policy stimulus may be fading and because of the fiscal drag from the April sales tax hike. Growth is expected to recover to about 1.5 percent in 2016, supported by structural reforms and supportive policy. Stronger growth, along with the sales tax increase should help to improve or stabilize extremely high public debt ratios and fiscal balances. Nonetheless, over the medium to long term much more fiscal consolidation (notably for entitlement spending) will be necessary. Corporate tax reforms (including a cut) also appear to be on the cards, and if introduced, could be implemented mid-2015.