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INFLATION A WORRY

Better year ahead as world economy recovers

London, January 16, 2014

A much better year lies in store for most of the world's major developed economies, although weak inflation will persist, complicating central banks' ability to get interest rates back to normal, Reuters polls forecast on Thursday.

As in the last few years, the US looks set to the lead the way, with growth also quickening in Britain and Germany.

However, Japan looks set to disappoint and the euro zone will probably lag again compared with its Western peers. Emerging markets again look a mixed bag.

Perhaps the main difference this year is that forecasts from the 300 or so economists polled across the world over the last week at least suggest little prospect of a return to recession in the euro zone, the world's largest trading bloc.

Overall, the poll showed the world economy will grow 3.6 percent this year compared with 2.9 percent in 2013. That would snap a three-year stretch of slowing global growth since the world economy first rebounded from the severe recession of 2009.

The last few months have been marked by steeply falling inflation in many of the top developed economies, with consumer prices rises in some cases far below stability targets set by their central banks.

Christine Lagarde, head of the International Monetary Fund, on Wednesday warned of the risk of deflation - a damaging and sustained spiral of falling prices - even as she was optimistic about improving economic growth.

Although the poll suggested deflation itself looks unlikely, weak inflation will remain widespread.

Consumer prices are expected to rise tepidly in most of the countries polled - even in the euro zone, where inflation slowed to 0.8 percent in December.

"We're not forecasting a descent into outright deflation. Instead, we're highlighting the risk that inflation remains too low or, worse, that it continues to sink over the next two years," said Stephen King, group chief economist at HSBC, in its global outlook for the year.

MIXED FORTUNES

Thursday's Reuters polls suggested mixed fortunes ahead for emerging markets.

Mexico's ambitious reform agenda will start to pay off after a very disappointing 2013, but the recovery will not likely be as strong as previously hoped as Latin America braces for a bumpy year for local markets.

Turkey too is on course for a difficult year ahead, although growth prospects in South Africa look better in 2014.

The consensus for the world's largest economy, the US, was upgraded slightly compared with a poll last month. It is expected to grow 2.9 percent, up from 2.6 percent in the December poll and versus an estimated 1.9 percent in 2013.

"It seems we are putting the Great Recession further and further behind us," said Russell Price, senior economist at Ameriprise Financial Services. "Consumers have reduced debt, corporate balance sheets are in better shape. There are lots of positives that are going to help rather than hinder growth."

In Japan, the world's No.3 economy, inflation will stay well below target, with the poll suggesting companies there are cautious about passing on their higher profits to employees - seen as vital for the country's economic revitalisation.

Indeed, Japan's economic growth is expected to slow to just 0.7 percent for the 2014-15 fiscal year, compared with 2.5 percent for the previous period.

The euro zone, by comparison, looks a long way from getting to that point.

While this year promises some modest economic growth - around 1.0 percent compared with a 0.4 percent contraction this year - the low level of inflation remains worrisome.

"Core prices pressures will remain low over the medium term," said Herve Amourda, economist at Societe Generale.

"In addition, risks are broadly tilted to the downside over the medium term, as we have identified a strong (euro), falling commodity prices or even stronger deceleration in unit labour costs to be the major threats to our scenario."

Britain looks on course to lead the way in terms of economic growth among Europe's heavyweight economies, where unemployment looks set to fall at a faster pace than the Bank of England's expectations that underpin its monetary policy stance.

The UK economy is expected to grow 0.6 percent per quarter through to the middle of next year, the end of the forecast horizon and the highest forecasts to date. - Reuters




Tags: inflation | recovery | World Economy |

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