(Click tables to enlarge)
What is the general view of the outlook for global growth?
The consensus view is more optimistic than for some time. After several years of false starts and disappointments the major investment houses see an improving global macro backdrop and, more importantly, the outlook appears better balanced, with both upside and downside risks to forecasts. Global growth forecasts from some of the major investment houses are shown below:
What are the key sources of this expected acceleration in global economic activity?
The following table from the recently published OECD Economic Outlook highlights the expected trends and main contributors to growth over the next two years:
As is evident from the table, the recovery in global growth is forecast to be driven by the developed economies (DM) with most commentators expecting DM to account for some 75% of the acceleration in growth in 2014. The two key contributors to this stronger pace of DM expansion are the US and the eurozone and both should benefit from two main trends:
- fiscal headwinds are expected to diminish markedly over the next year or so;
- monetary policy stimulus is gaining greater traction.
The scale of fiscal headwinds in the US and euro area were unprecedented in recent times. Over 2010-13 it is estimated that fiscal consolidation restrained growth by around 3.25-3.5%, with about half of that occurring this year in the US and in excess of 1% last year in the eurzone. Together with other uncertainties, including several debt and budget debacles in the US and the peripheral economic and banking problems in the EU, this had a powerful and depressing impact on demand. For 2014, the consensus belief is that fiscal consolidation will have far less of an impact being in the order of 0.5% of GDP in both the US and EU.
While somewhat further advanced in the US than the EU, highly accommodative monetary policy of virtually zero short-term interest rates and quantitative easing (driving government and corporate bond yields to all time low levels), expedited balance sheet repair by households and corporations, eased financial conditions and generated a housing recovery and substantial wealth gains.
These two factors, allied to increasing consumer and business confidence and reduced strains in the global financial system, should facilitate stronger growth and result in the US, at least, moving into a sustainable expansion phase and the EU out of recession.
Both the Japanese and UK economies are also forecast to grow at above-trend rates in 2014, the former, despite experiencing major fiscal contraction via its consumption tax rise, while the latter is set to grow at its fastest pace in seven years.
As for the emerging economies (EM), a moderate growth recovery is predicted by most commentators for next year. EM fundamentals have improved and resilience to external shocks has risen significantly since the 1980s and 1990s so, even with Fed tapering most likely beginning fairly soon, cyclical rebounds are underway in a number of major economies.
As ever in EM, China is the key (some 36% of total EM GDP and the dominant player in the commodity markets so important to many EMs) and the consensus expects Chinese GDP growth to stabilise at around current levels. The Chinese government’s growth target is likely to be set at 7% for 2014, however, although that should be the bottom line.
Where are the main risks to global growth forecasts?
So far, US corporates have conspicuously failed to step up capital investment programmes and relatively slow growth in capex has kept private sector domestic demand relatively subdued. An acceleration in corporate spending and hiring are prerequisites for attaining sustainable expansion in the US, the key to 2014’s acceleration in global growth.
China is one obvious risk where focus on the reform programme and recent stronger data should not disguise the credit boom, pressure on government-backed companies, an overheated property market and rising bond yields. Reform will come at a cost and long term gain is likely only after shorter term pain.
It is also possible the US grows at a faster pace than predicted. The macro-backdrop, while not transformed, is far better than just two years ago as economic imbalances in unemployment, the current account deficit and fiscal deficit have eased significantly so that the US is the most improved of all the major economies.
Will inflation be a global issue?
The global economy is still in a disinflatory phase and recent commentary has centred more on deflation than inflation in DM, given a general undershooting of core CPI targets. Deflation will be fought aggressively, however, especially in the EU, as nobody wishes a repeat of the Japanese experience. Until growth is strong enough for long enough to generate capacity and wage pressure, inflation will likely remain benign. On a longer term perspective, and assuming the US economy grows at trend or above over the next few years, inflation is likely to accelerate, given the new Federal Reserve (Fed) Chair, Janet Yellen, is widely viewed as being more tolerant of higher inflation.
In EM, a few key countries are battling rising inflation but, in general, disinflation is re-emerging.
When are interest rates going to rise?
In the US at least, easing back on QE is the first item on the agenda. The Fed is inclined towards an earlier tapering but is being hindered by upcoming fiscal policy debates and the change of Fed chair. Economic data is now less of an issue following recent GDP and employment reports and a number of commentators have brought forward the tapering starting date to December from March.
The Fed appears to have succeeded in divorcing "tapering" from "tightening", at least for now, as the forward markets are not pricing-in a US rate rise until Q3/Q4 2015. UK rates are expected to rise at a similar date, maybe a quarter earlier, but euro area growth and inflation trends are unlikely to justify any rise in interest rates for many years to come. All the central banks have centred on forward guidance as the main policy weapon going forward, although providing financial markets with higher degrees of certainty also has the unintended and disquieting affect of encouraging carry trades.
Overall, monetary policy will likely remain highly accommodative for at least another eighteen month to two years in the US, UK and EU, while in Japan, the BOJ looks set to significantly expand its balance sheet in either Q1 or Q2 of 2014.
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