Author: Stefan Schneider (+49) 69 910-31790
December 19, 2013
Seven years after the onset of the global economic and financial crisis the global economy should start to post trend growth of 3 ½% to 4% again in 2014. Following several years in which hopes of an economic upturn have been dashed the interplay of five drivers may finally effect a turnaround for the eurozone economy. The growth is, however, likely to end up being a very modest 1% following a contraction of 0.4% in the current year on account of the deleveraging that still has to occur in the private sector and over the medium term also in the public sector.
1.) US economy to pick up further. The sector that triggered the global financial crisis has undergone the most extensive cleaning-up. There has been a turnaround in the real estate market, with house prices in conurbations rising at double-digit percentage rates. Combined with booming stock markets this has helped US households make major progress in their financial recovery. In the fiscal clinch, which with automatic spending cuts (sequester) as a kind of collateral damage has considerably reduced the budget deficit in 2013, a more moderate tone seems to be emerging. Also, the Fed's recently announced start of the exit from its securities purchasing programme ("tapering") in January should occur without any major problems as it has already been priced in. We therefore expect the US economy to continue picking up pace in the course of 2014 and to grow by 3.2% for the full year compared with 1.8% in 2013.
2.) Reforms driving Chinese growth above 8%. The extensive reforms passed in November are likely to curb state influence on companies and the financial system and thus boost the efficiency of the economy considerably. In the remaining emerging markets, too, growth is likely to pick up further in 2014, even though the high medium-term growth expectations have been revised downwards substantially in many cases.
3.) Fiscal policy in the eurozone generating little drag. The ECB's commitment to provide potentially unlimited support (OMT) in the problem countries has slowed the pace of fiscal consolidation slightly. In 2014 the structural deficit is likely to be trimmed by only about ¼ of a percentage point of GDP. This means, however, that eurozone debt will not start to decline until 2015 at the earliest.
4.) Progress towards banking union. Individual countries have made progress in consolidating their banking systems, in no small measure with an eye on the ECB's comprehensive assessment of their major banks in 2014. This could relieve the pressure on banks to boost their capital ratios, which should also lead to a stabilisation of lending. This would further attenuate the negative cyclical impact of fiscal policy.
5.) A stronger USD. US growth of more than 3%, the growing expectation that US key rates will rise significantly in 2015 and the medium-term structural relief for the US current account resulting from the huge rise in domestic energy production should set the USD on an uptrend for a number of years. This should give an additional boost to European exports.
So is everything fine and dandy in Europe and the world? Even though the chances of a recovery appear much better, it should not be forgotten that the global economy posted about ¼ of percentage point weaker growth than we forecast for both 2012 and 2013. The rise in bond yields triggered by the change of tack in US monetary policy could turn out to be much more pronounced than we forecast. This could lead to problems especially for emerging markets where credit volumes have grown significantly in recent years. But in Europe, too, besides the vagaries of the comprehensive review of the European banking system by the ECB and EBA the political developments in many member states hold considerable potential for disruption. Best wishes for a happy and successful 2014 are thus very much in order.
See also: World outlook, December 2013 "A leap back to trend growth"
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