- 1. US growth will slowly speed up.
The US recovery lost steam in 2013 because of massive fiscal tightening. The drag from fiscal policy (estimated to have been about 1 percentage point of GDP growth) will probably be far less over the coming year—especially in light of the mid-December budget deal made by the US Congress. This will allow the underlying strengths of the economy to become more visible. These include continued strength in housing (despite the recent run-up in mortgage rates) and the ripple effects of the unconventional oil and gas boom. IHS Markit also expects that the pace of capital spending will gather momentum, making it one of the engines of growth in 2014, although this growth will remain subdued relative to cyclical recoveries in the past few decades. Steady growth of consumer spending will also help to support US growth, with real GDP expected to increase 2.5% in 2014, after a meager 1.8% gain in 2013.
What actually happened:US growth picked up from -2.0% in the first quarter (a highly suspect number because of poor seasonal adjustments and distortions created by the rollout of the Affordable Care Act, which is likely to get revised upward in the future) to 4.6% in the second quarter and 5.0% in the third.
- 2. The European recovery will proceed, but at a very sluggish pace.
Despite some signs of weakness, the nascent Eurozone recovery will have staying power. A multitude of factors will support growth (0.8% in 2014), including: very accommodative monetary policy, stabilizing labor markets, less emphasis on austerity by EU officials, improved spending power because of ultra-low inflation, better competitiveness in the peripheral countries, and more confidence in the ability of Eurozone politicians to manage the sovereign-debt crisis. Even with these positive trends, some countries (e.g., Greece, Italy, and Spain) will struggle to achieve positive growth. On the other hand, both Germany and the United Kingdom will grow faster in 2014 than they did in 2013.
What actually happened:UK growth accelerated, while the Eurozone turned the corner, showing positive growth after two years of recession.
- 3. China's growth rate will be sustained.
After hitting a low point in early 2013, China's recovery reaccelerated thanks to the government's "mini-stimulus." IHS Markit expects the pace of Chinese growth to quicken a little from 7.7% in 2013 to 8.1% in 2014. Further moderate stimulus will be applied if growth falls below 7.5%. Much stronger stimulus will be forthcoming if growth falls below 7.0%. The bigger growth challenge for China will be over the medium term, as the country deals with the daunting problems of an aging population and the consequences of rapid credit growth, including a new housing bubble and rising debt levels. Whether China can avoid the "middle-income trap" is one of the bigger uncertainties facing the global economy in the coming decade.
What actually happened:On an annual basis, China's growth rate decelerated a little, from 7.7% in 2013 to 7.3% in 2014. However, on a quarter-on-quarter annualized basis, growth accelerated from 6.1% in the first quarter to an average 8.0% in the second and third quarters.
- 4. Other emerging markets will also perform a little better.
The global environment facing emerging markets will be more growth friendly than it has been in the last three years. US and Chinese growth will be a little stronger and the Eurozone will no longer be a drag on the world economy. This means that emerging-market exports will again become a source of growth. IHS Markit expects that real GDP growth for these economies will strengthen from 4.7% in 2013 to 5.4% in 2014. Implicit in these forecasts is the expectation that the 2014 "tapering" of US monetary policy will have a relatively minor impact. Nevertheless, a return to the very rapid growth rates enjoyed in the boom years of the 2000s is unlikely, unless the governments in these countries enact more structural reforms that raise productivity, allocate capital more efficiently, and, thereby, boost potential growth.
What actually happened:Despite slumping growth in a couple of large emerging markets (Brazil and Russia), the pace in many others either accelerated (including India, Central Europe, and the Middle East and North Africa) or stayed strong (almost all of Asia and Africa).
- 5. Unemployment rates in the developed world will remain high.
The unemployment rate in the advanced economies will only decline from 8.1% in 2013 to 7.8% in 2014. Technology-driven productivity improvements in both the manufacturing and services sectors will continue to erode the demand for labor. Firms' aggressive cost-cutting efforts will continue largely unabated in 2014, heightening pressures on many governments to implement corrective pro-employment policies. In the United States, the unemployment rate is expected to decline from 7.4% in 2013 to 6.6% in 2014—as much from weakness in labor-force growth as from genuine employment growth. The issue of discouraged workers could become a major political issue in the 2014 congressional elections. In the Eurozone, unemployment will remain near its record highs, elevating this issue's importance relative to continued emphasis on austerity.
What actually happened:Unemployment rates are still high in large parts of the developed world (especially the Eurozone). Even in the United States, long-term unemployment rates remain historically elevated, and the headline rate may be biased downward by the low labor-force participation rate.
- 6. Commodity prices will go nowhere and inflation will remain a low-level threat.
During the coming year, gradually strengthening demand for most commodities will be balanced out by either higher production or ample inventories. This means that the movement of commodity prices in 2014 will be essentially the same as in 2013—they will go nowhere. Tame commodity markets, along with excess capacity in labor and product markets, will keep 2014 CPI inflation below 2% for the advanced economies. A growing risk is that inflation could continue to fall, as it has since 2011. Price pressures will also ease in the emerging world. IHS Markit expects that the recent rise in emerging-market inflation—the result of the "taper panic" from May to August 2013, which pushed down exchange rates and pushed up imported inflation—will reverse.
What actually happened:Inflation remained a low-level threat, but commodity prices plunged.
- 7. The Federal Reserve will start scaling back its stimulus, while other central banks will likely wait or provide more stimulus.
The Fed is expected to begin scaling back its bond purchases no later than January 2014, while leaving interest rates unchanged until early 2015. Similarly, IHS Markit expects the Bank of England to wait until the second half of 2015 to raise interest rates. On the other hand, given continued weakness in Eurozone growth, the European Central Bank may feel compelled to do its bit by engaging in another round of Long-Term Refinancing Operations (LTROs). In late 2013, some emerging-market central banks began raising rates; but as inflationary pressures ease, they will likely put policy on hold or (in a few cases) ease.
What actually happened:The Fed did end its bond-buying program, but the Bank of Japan, European Central Bank, and the People's Bank of China either cut rates or announced expansions of their bond purchases.
- 8. Fiscal headwinds will ease.
With the US federal spending sequester now replaced by a fiscal compromise worked out between the Democrats and Republicans, IHS Markit expects the drag from US fiscal policy to ease considerably in 2014. One manifestation of this will be an unchanged federal budget deficit (at just under $700 billion) from 2013 to 2014—following a sharp decline from around $1.3 trillion in 2011. A similar easing of fiscal pressures will be evident in Europe. After having been slashed during the past three years, the budget deficits in many of Western Europe's economies will fall more gradually over the coming year, as they near more-sustainable levels relative to GDP. Many of the "crisis economies" of the Eurozone will be given a little more time to meet their fiscal targets.
What actually happened:Fiscal austerity in the Eurozone became less intense and US fiscal policy shifted to neutral. Japan was the only developed economy to tighten fiscal policy.
- 9. The US dollar will strengthen against most currencies.
Two important trends will push the dollar up against most of the world's key currencies. First, US growth will be strengthening and growth differentials with other advanced economies will be sizeable. Second (and possibly more important) is the near certainty that the Fed will be removing stimulus sooner than most other major central banks. This will weigh down on the euro and the yen. It will also push down the currencies of emerging markets—especially those that have precarious balance-of-payment conditions. Since financial markets have already anticipated a Fed tapering, the impact of the actual tapering when it happens could be smaller than what happened in the summer of 2013. The Chinese renminbi is the only major currency that will probably appreciate against the dollar in 2014.
What actually happened:The dollar strengthened about 8% against major currencies, and substantially more against some currencies, such as the Russian ruble.
- 10. There will be more upside risks than downside risks facing the global economy.
In recent years, the US, Eurozone, and Japanese central banks have exhibited a proactive approach to managing crises (despite facing vocal domestic debates), and have thereby removed some of the impediments to future economic growth. This has contributed to a shift in the balance of risks from negative to neutral. Over the next year, we are likely to be more surprised on the upside than the downside. There will certainly be no shortage of potential downside risks—instability in the Middle East and North Africa, more fiscal drag, more disappointing news from emerging markets, etc. At the same time, we could see stronger-than-anticipated growth in the United States, the United Kingdom, and Germany. Emerging markets such as China, India, and Brazil could also do better than predicted. Stronger growth in some of the world's key economies will also help bring about a broader global rebound.
What actually happened:While there was no shortage of downside risks in 2014 (e.g., continuing turmoil in the Middle East and North Africa, the Russia/Ukraine conflict, new recession in Japan, etc.), more monetary stimulus from key central banks, lower oil prices, and solid US growth supported a mild acceleration in the global economy as the year progressed.