This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Stuart Thomson, manager of the Ignis Absolute Return Government Bond Fund discusses the outlook for global economies.
This year marks the seventh year of what we term the VILE decade – Volatile Inflation, Limited Expansion. We expect to see a continuation of the global economic improvement started in 2013; however, growth will be unsynchronised, with Europe and emerging economies significantly lagging those of the UK and US.
Strong growth in the US and UK during 2013 has provided clear evidence that central bank quantitative easing programmes have been effective. In the UK we expect this strong growth to continue into 2014, with the economy recording more than 3% annual growth. The US economy is expected to experience a similar growth rate as the fiscal headwinds abate and businesses respond to the improving credit availability.
While the UK and US economies provide the main source of growth for the global economy next year, European and emerging economies will continue to struggle and be a source of disinflation.
These economies will continue to experience growth-recessions; growth above zero but below productive potential. This means that the negative output gaps will not be closed and that there will be downward pressure on inflation in these regions. These economies will seek to export their disinflation through currency depreciation in a similar manner to Japan’s efforts to export its deflation through the weak yen.
The global economy will gradually improve next year but this recovery will be unsynchronised, with Europe and emerging economies significantly lagging the UK and US. To compensate for this weakness, Europe and the emerging economies are expected to export their disinflation through currency weakness. A stronger US dollar is a consensus expectation next year as a result of faster growth. Faster US growth is a necessary, but not sufficient, condition for currency appreciation because Europe’s current and capital account surpluses put upward pressure on the currency. We believe that the deflationary threat of further currency appreciation will force the European Central Bank (ECB) to resort to further unconventional monetary policies to weaken the euro. This is likely to be through a combination of another long-term repurchase operation (LTRO) in combination with a negative deposit rate or quantitative easing purchases of government bonds in proportion to the share of the central bank’s capital.
The appreciation of the US dollar, and indeed of sterling, will keep a lid on their domestic inflation. This in turn will constrain nominal GDP growth.
