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News Release

Peterson Institute Forecasts Marked Down Due to Unnecessary Fed and Fiscal Tightening, EM Turmoil—But Still Above Consensus for China, Japan and US

October 1, 2013

Washington—In their new forecast of the global economic outlook, economists at the Peterson Institute for International Economics are projecting a slower rate of growth for the United States, China, India and some emerging market countries than they did last spring, and a very slow recovery from the downturn in Europe. Yet, Peterson Institute experts David J. Stockton, Nicholas R. Lardy, and Arvind Subramanian, remain more positive on the near- and medium-term prospects for the US, China, Japan, and many emerging markets than the growingly pessimistic consensus view.

The Peterson Institute outlook team, led by Stockton, will present their forecasts at 12:30 p.m. (EDT) on Tuesday, October 1, with additional comments by PIIE President Adam S. Posen. The live webcast and the experts' presentations will be available on the Peterson Institute's website.

US economic growth, in particular, is projected to be only 1.9 percent (real Q4Q4) in 2013, gradually accelerating to 2.9 percent in 2014, and 3.2 percent in 2015. The outlook has been revised down from 2.3 percent, 3.1 percent, and 3.3 percent for these years respectively, as talk of the "tapering" of monetary stimulus by the Federal Reserve has driven interest rates up, and the sequester and fiscal uncertainties are also holding back economic activity. David J. Stockton, formerly Director of Research and Statistics at the Federal Reserve Board and now senior fellow at the Institute, says that the Federal Reserve's decision not to taper its stimulus in September still leaves most of the contractionary effects of the premature talk of tapering.

Stockton projects that US unemployment is likely to remain above 7.2 percent through the end of 2013, dropping to 6.7 percent in 2014, and 6.2 percent in 2015. He also warns that a default on US debt payments as a result of political disagreement in Washington would have immediate and substantial negative effects on the US economy that would be difficult to quickly reverse.

Stockton forecasts that Europe's steep and prolonged recession is ending, but that the recovery will be very slow, with a turnaround from a –0.2 percent contraction in 2013 to an expansion of only 1 percent in 2014. Under the policies of fiscal and monetary stimulus in Japan, Japan is expected to grow at 2 percent in 2013, but restraint from expected increases in consumption taxes will lower growth in Japan to 1.7 percent in 2014 and 1.9 percent in 2015.

China, meanwhile, is expected to continue to grow in the 7–8 percent range annually, following six consecutive quarters of growth below 8 percent, according to Nicholas R. Lardy, the Anthony M. Solomon Senior Fellow at the Institute. While some other forecasts project a sharp decline in China's growth, Lardy says such negative outcomes are unlikely for China. Lardy argues that China's economic slowdown was driven by transient domestic factors, rather than by the capital outflows that have hurt other emerging economies or by a slump in its exports.

Arvind Subramanian, the Peterson Institute's Dennis Weatherstone Senior Fellow, projects that all of the major non-China emerging market economies are facing a slowdown in the short term, but that the change in the external environment would not alter the medium-term prospects for many of them.

Focusing on India, Subramanian says the country's recent economic turmoil, featuring a steep depreciation in its currency, has resulted from a neglect of inflation and budgetary discipline. As a result of this domestic instability, India's middle class has been exporting capital in the form of buying gold. Subramanian attributes much of India's inflation and currency problems to its growing fiscal deficits combined with easy monetary policy.

This will be the twenty-third semi-annual economic outlook session at the Peterson Institute for International Economics. Held the week prior to the release of the IMF World Economic Outlook in fall and spring, these forecasts present the best thinking of the Institute's experts on the economic policy challenges facing the US and other major economies, and on where the market consensus and official sector seem to be going astray in their assessments. The Institute's semi-annual outlook sessions always feature the presentation of the US and global outlook by Institute Senior Fellow David J. Stockton, as well as two other presentations by rotating Institute experts, focused on key regions' development over the next two years.

About the Forecasters

David J. Stockton, Peterson Institute senior fellow and senior adviser to Macroeconomic Advisers, was chief economist for the Federal Reserve Board from 2000–2011.

Nicholas R. Lardy, the Institute's Anthony M. Solomon Senior Fellow, has been called "everybody's guru on China" by the National Journal. He is the author of Sustaining China's Economic Growth After the Global Financial Crisis (2012).

Arvind Subramanian, the Institute's Dennis Weatherstone Senior Fellow and senior fellow at the Center for Global Development, is author of Eclipse: Living in the Shadow of China's Economic Dominance (2011). He is also coauthor of Who Needs to Open the Capital Account? (2012).

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About the Peterson Institute

The Peterson Institute for International Economics is a private, nonprofit institution for rigorous, open, and intellectually honest study and discussion of international economic policy. Its purpose is to identify and analyze important issues to making globalization beneficial and sustainable for the people of the United States and the world and then to develop and communicate practical new approaches for dealing with them. The Institute is widely recognized as nonpartisan. It receives its funding from a wide range of corporations, foundations, and private individuals from the United States and around the world, as well as from income on its endowment.