World (excluding the U.S.) economic growth stood at 3 percent year over year in fourth quarter 2013, with the gap between advanced (excluding the U.S.) and emerging economies narrowing to 1.6 percentage points—the smallest growth differential since fourth quarter 2002. [1] Headline consumer price index inflation for the world (excluding the U.S.) stood at 3.3 percent year over year in March 2014, running slightly ahead of core inflation (2.8 percent year over year).
The outlook is largely unchanged in recent reports, with world economic activity projected to grow 3.6 percent in 2014 and 3.9 percent in 2015, according to the International Monetary Fund’s April 2014 World Economic Outlook.[2] The expected growth uptick is supported by the firming of the advanced economies’ recovery, but concerns remain about lower-than-expected inflation in advanced economies and slower medium-term growth in both advanced and emerging economies.
Euro Area’s Low Inflation Prompts ECB to Consider Monetary Easing
The euro area’s 0.5 percent headline inflation is well below the European Central Bank’s (ECB) target of “below, but close to, 2 percent,†raising fears of a period of low inflation or deflation (Chart 1). Given high unemployment, slack and pressures from low import prices in the euro area, inflation could keep falling. The perceived risk is that sustained deflation could lower inflation expectations and push the real interest rate higher than required to maintain growth at potential, adversely impacting economic activity. ECB President Mario Draghi stressed that medium-term inflation expectations remain firmly anchored, but added that recent low readings were a “genuine surprise.†Draghi indicated that there was unanimity among the ECB Governing Council members on using unconventional tools, if needed—“there was a discussion of [quantitative easing] QE†(Chart 2). Other major advanced economies have pursued monetary accommodation through unconventional tools to provide additional support to their economies.[3]
