Quiet start to an important year for the global economy
The past two years have started in a mood of crisis with grave concerns about global economic prospects. This year has been refreshingly different. The recent news has not all been positive, but there is a sense of steady economic improvement and of reducing risk as the developed world emerges from its long slump. The upheaval of the autumn’s U.S. budget crisis appears to be past now and the figures are generally pointing to a healthier 2014.
The year ahead will be critical for policymakers in setting the tone for the recovery. In the West, the focus of the past five-years has been simple: healing the damage from the financial crisis and restarting growth. With that largely achieved, the choices become more complex. The list of challenges ahead will include: resetting interest rates back to ‘normal’ levels; cutting still-bloated fiscal deficits; unwinding the QE stimulus; and dealing with early signs of overheating in financial markets. In the emerging world, the emphasis will be on reforms to sustain growth and dealing with greater competition from the developed world for investment capital.
U.S. tapering marks start of sea change in monetary conditions
After all the previous upheaval, when the Fed eventually finally announced a tapering in its QE programme just before Christmas, the market response was surprisingly muted. Few felt the previous postponement was anything but a temporary pause with the economy strengthening, while the Fed has underpinned its latest statement with some cautious guidance on future interest rates rises. Nonetheless, Bernanke has confirmed that tapering could be complete by year’s end and many now expect rates to rise again next year.
The consequences for the U.S. economy should not be too painful. Elsewhere there are more concerns. In the Eurozone, for instance, the recovery is not yet as well established; a recent ECB cut in policy rates highlights the very different monetary environment. Of even more concern will be how monetary changes impact on emerging markets, which have thrived in recent years. The risk is that tapering will boost the dollar and weaken commodity prices, adversely affecting the more vulnerable parts of the developing world.
Recovery appears on track, but outlook remains cautious into 2014
Data releases have generally been more encouraging, and over the last three months, there have been notable upward movements in GDP growth expectations for 2014 in the U.S., the UK and Germany. A key point to note is that even though an improvement on last year is generally expected, most economies will still only be returning to their historic trend after five years of below-par expansion.
U.S. leads the revival in the developed world
Global GDP is expected to rise by 3.3% during 2014, a rate slightly ahead of the historical average. This expansion is supported by emerging markets, where growth rises to 5.3% this year, with reviving exports to the West an increasingly important factor. In the developed world, after anemic growth since 2010, an acceleration is also in prospect. Global expansion is then anticipated to build over the medium term as recovery in both emerging and developed markets broadens.
Emerging markets in Asia will continue to drive global growth this year and beyond. In China’s maturing economy, medium-term prospects will be constrained by the need to shift growth towards consumers and avoid asset price bubbles; sub-8% growth rates are becoming the new norm in China. India faces even more challenges in the immediate future, but GDP growth is likely to recover steadily over the medium term.
The U.S. is forecast to lead the upturn in the developed world, with 2.7% growth predicted in 2014 and returning to trend in 2015, even as the Fed begins to tighten interest rates. Japan’s near-term prospects have improved with ‘Abenomics’ and 2014 is expected to see further respectable activity, but there remain doubts over the sustainability of the upturn beyond.
The Eurozone is projected to emerge from recession this year. Germany is expected to show the strongest upturn during 2014, while France’s recovery is weaker. Recessions in Spain and Italy are forecast to continue into a third successive year, though the contraction is less severe and growth is in prospect from 2015.
In the rest of Europe, prospects are more solid. The UK has seen a further upward revision in projections for this year, while the Nordics are slightly less buoyant, but are also expected to see growth rates above those of their Eurozone neighbors. Emerging Europe is likely to see the continent’s strongest growth, led by Turkey.