Thursday, December 26, 2013

Global outlook: US rebound is key to prospects - Financial Times

Global outlook: US rebound is key to prospects

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December 23, 2013 8:27 pm

Global outlook: US rebound is key to prospects

By FT reporters

©Bloomberg

A detail of the Federal Reserve building in Washington

It is the year of the taper in 2014. By outlining a timetable for scaling back its third round of monetary stimulus starting in January, the US Federal Reserve believes that the world’s largest economy is strong enough to slowly switch off its life-support machine.

This has implications across the globe. If all goes to plan, US demand will pick up the slack in the global economy and suck in exports from across the globe.

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IN GLOBAL ECONOMY

But there are potential pitfalls. For some emerging economies, any reversal of capital inflows further exposes the need for reforms that they will be reluctant to undertake during election years.

The eurozone recovery is fragile at best. In both the currency bloc and the US, disinflationary pressures are evident as wages remain stagnant even if activity is picking up. All this alongside uncertainty over which reforms Beijing will prioritise and what that means for Chinese growth will make 2014 a year with plenty of economic obstacles to negotiate.

US: By Robin Harding in Washington

For the past four years, analysts have predicted an imminent acceleration in the US economy, and got it wrong. The mediocre record is growth of 2.5 per cent in 2010, 1.8 per cent in 2011, 2.8 per cent in 2012 and something around 2 per cent in 2013.

But, undeterred, forecasters say 2014 really will be a year of growth, and they are more confident than ever. The Federal Reserve expects a level of 3 per cent; the Wall Street consensus is a little lower.

“Growth is picking up and unemployment is going down,” said Christine Lagarde, managing director of the International Monetary Fund. “So all of that gives us a much stronger outlook for 2014, which brings us to raising our forecasts.”

The reason for this optimism is an expectation that headwinds holding back the US economy will abate. Households have made progress deleveraging their balance sheets so they should be able to borrow again; US fiscal policy is broadly settled for the next couple of years and should not drag on growth; the eurozone economy is more stable if not healthy; and housebuilding is on the rise.

With all of that in place, there is reason to hope for an uninterrupted year of growth. The still-high unemployment rate – it is 7 per cent with many more people sitting out of the labour market – leaves enough slack for the economy to expand faster than its trend rate of growth.

Eurozone: By Claire Jones in London

For a currency bloc that faced financial and economic Armageddon in 2012, the European Central Bank’s growth forecast for next year of just 1.1 per cent represents progress.

Unemployment, close to its record at 12.1 per cent, is unlikely to fall sharply next year, while inflation is set to stay well below the central bank’s target of just under 2 per cent.

Much will depend on whether business investment and consumption pick up, especially in Germany. The region’s largest economy is expected to run close to full capacity and rising confidence among consumers suggests that they could start spending more. Yet all-important business investment remains weak.

And a lack of reform in other large economies is a worry. Spain may have made progress with labour reform, but there are concerns that Italy and France, the bloc’s second- and third-largest economies, have not done enough.

The banking system remains weak and the ECB must balance ensuring that its health check of the sector is tough enough to be credible, while avoiding another market panic. A stronger euro would complicate matters by making much-needed exports less competitive.

If growth disappoints or disinflation worsens, expect the ECB to act. Some believe 2014 will be the year when the central bank resorts to quantitative easing. At present, this is an outside option – a cut in deposit rates or more offers of cheap longer-term loans are more likely in the short term.

China: By Simon Rabinovitch in Beijing

Having spent 2013 consolidating his power, 2014 is the year in which Xi Jinping, China’s president since March, will begin implementing his economic policy agenda in earnest.

Mr Xi wants, among other things, to give non-state companies more freedom to expand their businesses; make it harder for local government to rack up debts; and to speed up the deregulation of interest rates. He wants to give greater play to market forces in the belief that China’s government-led growth model is running out of steam.

Investors have reacted favourably to his plans, but implementation is fraught with challenges. China’s economic outlook for next year will hinge in no small part on whether Mr Xi pushes for difficult reforms first or instead goes for easy options.

In the latter case, it would cost the government very little to allow non-state companies to invest in a wider array of sectors, from banking to energy. Such easier reforms tend also to be more pro-growth. Harder reforms, such as capping local government debt, are bound to run into opposition and immediately limit growth.

The evidence is mixed. Mr Xi has made more progress on easier reforms, like relaxing the one-child policy. At the same time he has let money market rates rise, a move needed to rein in debt accumulation but one that could damp growth next year.

Japan: By Ben McLannahan in Tokyo

It is hard to look beyond April. An increase in consumption tax from 5 per cent to 8 per cent, effective that month, is expected to do damage. Economists surveyed by Bloomberg predict private consumption will drop by almost a tenth from the first to the second quarters, causing the whole economy to shrink at an annualised rate of almost 4 per cent.

If so, it could be the first slippage in the world’s third-largest economy since Shinzo Abe returned to power as prime minister just over a year ago. It might also vindicate those of his advisers who argued against the rise.

Japan’s broader recovery could survive the hit, though. In 2013, real growth of about 1.8 per cent was underpinned by a powerful combination of fiscal and monetary stimulus and in 2014 the same forces could kick in again. Regulatory reforms, too, could have a role to play.

But in November, the government will have to rule on another consumption tax increase, to 10 per cent, for October 2015. The International Monetary Fund says that step is vital if Japan is to get a grip on its debt, almost two and half times the size of the economy. If growth is knocked by the first rise, Mr Abe, facing a party leadership election in September 2015 – may find it easy to push back the second.

Emerging markets: By Delphine Strauss in London

Emerging markets spent much of 2013 in the shadow of the US Federal Reserve’s plans to start scaling back its monetary stimulus. Now the tapering plan is announced, another indiscriminate sell-off is unlikely; but investors remain wary of the structural challenges facing countries that have delayed reforms.

Those that can take advantage of a recovery in the US and other developed economies are likely to do best, such as Mexico, or countries with competitive manufacturing sectors in central and eastern Europe.

However, the effect of stronger US growth will be diluted if it leads the Fed to reduce its stimulus faster than expected. The economies that previously borrowed heavily from abroad to fund growth may struggle, especially since several of those seen as most vulnerable are entering election periods that may hinder reforms.

In Brazil, the government faces inflationary pressures and will be unwilling to address its budget deficit as presidential elections approach. India, Indonesia and Turkey may also be reluctant to tackle reforms as they go to the polls against a much tougher economic backdrop than during previous elections.

But a bigger risk may be that of spontaneous political upheaval. In the past month, anti-government protests have spilled on to the streets in Ukraine, Thailand and Turkey and in many countries, middle-class voters are ever more ready to express dissatisfaction over higher prices, stagnating incomes, political repression or corruption. Yet they may have come to expect faster growth rates than emerging markets can sustain.

JKHC FORUM

Thursday, December 26, 2013