Forecast 2014: Economic Trends - Geopoliticalmonitor.com

Forecast 2014: Economic Trends

January 6, 2014

Ronan Keenan

Wall Street Bull

Geopoliticalmonitor.com

This time last year, the majority of financial commentators held a downbeat outlook for the global economy in 2013. The potential for instability was seemingly high, but in reality it turned out that the greatest shock was a lack of any major shocks.

In the United States, the Federal Reserve reduced its monetary stimulus measures and stock markets actually rallied on the news. Unemployment fell to a five-year low of 7% and a government shutdown came and went without hysteria. An unfamiliar calm reigned over the eurozone through the year, resulting in a welcome decline in bond yields for the weaker “periphery” nations. China successfully reversed its slowing growth, while Japan’s extraordinary stimulus policies helped reinvigorate an economy that has suffered a quarter century of stagnation.

By year end there was synchronized growth from the major global economies, pointing to an optimistic outlook for 2014. The smooth navigation through so many potential shocks naturally bodes well for this year, but enough headwinds remain to keep growth modest.

US Growth Gaining Momentum

Expectations are relatively high for the US economy, with growth forecasts broadly surpassing the expected final 2013 figure of 2%. The economic drag caused by the sequestration budget cuts will no longer be a factor and significant progress has been made in reducing corporate and household debt. Moreover, developments in shale energy will aid US manufacturing, particularly in the petrochemical sector. A stable environment should bring near-term benefits to rising asset prices and the housing market.

Yet several issues cloud the positive outlook. The Federal Reserve may have begun tapering its quantitative easing strategy without market panic, but the timeline of its ultimate exit from the stimulus program remains unclear. And while there are signs that political gridlock in Congress may abate somewhat, it is unlikely that there will be any development of progressive fiscal policies. Moreover, household income levels are expected to remain stagnant, meaning that a robust increase in consumer spending is unlikely, casting doubt on whether the US economy can make a smooth transition from central bank stimulus to self-sustained growth.

Japan’s Stimulus Measures Fruitful, For Now

The aggressive monetary expansion launched by Japanese Prime Minister Shinzo Abe in late 2012 has delivered on its intention to reverse deflation. The rationale behind the initiative is that sustained inflation will see depressed wages rise and boost consumer spending as households realize that prices will no longer follow a downward trajectory. Growth and inflation both rose last year and 2014 should see a continued increase.

A potential risk to growth exists in the introduction of a 3% sales tax increase which may dampen economic activity. Abe has promised further stimulus to offset any negative impact from the tax; a strategy which should prove successful. But the need for the rise in sales tax is a more serious issue. Japan must ease its huge public debt burden, which is forecast to reach 230% of GDP in 2014. Financing such debt can be treacherous, and a sharp rise in Japan’s sovereign bond yields would make debt-servicing costs unsustainable. Such an outcome would prove disastrous for the Japanese economy.

Eurozone: The New Japan?

While Japan recovers from decades of deflation, the eurozone risks falling into its own trap in 2014. 2013 was good for the eurozone largely because nothing much happened; financial markets interpreted no news as good news. Fears of a breakup have cooled and the 17-country bloc emerged from recession last year. But growth in 2014 is expected to be minimal, inflation is anemic and major structural issues remain.

Eurozone unemployment remains stubbornly high at 12.1%, with several of the bigger nations hampered by a lack of competitiveness due to high labor costs and a strong currency. The leadership may be moving away from the ideology of severe austerity measures, but public debt levels remain elevated and nations will need to continue to improve their financial balances to attract foreign investors. Similarly, banks will remain in deleveraging mode, especially following region-wide stress tests, resulting in a continuation of tight credit conditions.

Some support should come from the ECB through easier monetary policy, aiding market sentiment over the near-term. But progress on a banking union shows signs of remaining painfully slow and developments on fiscal union are nonexistent.

Economic and Debt Growth in China

Ballooning debt growth in China has been a burgeoning issue over the last couple of years.  In 2012, China’s central bank made efforts to tighten credit, but these initiatives slowed economic growth. That was an undesirable outcome for the leadership, so last year credit conditions were eased and infrastructure investment was increased. Chinese economic growth rebounded quickly, calming fears of a “hard landing.”

Creating more debt will not help China in the long-term. Beijing is attempting to change its model from a reliance on foreign demand for its exports to an economy driven by sustainable domestic consumption. But households do not have adequate wealth to drive the economy, and have therefore relied on debt to maintain growth. The Chinese leadership will need to introduce significant economic and political reforms to reduce its reliance on debt. However, during the transition it must be careful to maintain growth and avoid any crash that would have a far-reaching impact.

Conclusion

2013 turned out to be a pleasant surprise for global markets, spurring optimistic forecasts for the year ahead. 2014 will likely be a better year for global growth and many near-term risks have dissipated. Yet such upbeat sentiment should not distract from the political dysfunction and absence of progressive reform policies in some of the world’s most significant economies.

Ronan Keenan is a contributor to Geopoliticalmonitor.com

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  • benevolent dictator

    Hi Roman,
    Do you know what currency(ies) the Iranians are using in their oil exchanges for 2014, esp the Kish exchange?xIvI

  • Robert Christie

    Repeating the government’s phony statistic of 7% unemployment indicates the writer is a shill for Obama. It casts doubt on the efficacy of the rest of the material. Dishonest reporting is a turn-off to aware readers.

  • M Lawrence

    I am very disappointed in your article. The US economy is not growing…you are not addressing the fact that the underemployment and those who have dropped off the unemployment rolls or the applicants who have given up and decided to not seek employment…some of whom are now applying for Social Security disability or SSI. Also, the unemployment rate is not 7% across the board.

  • http://www.economic-undertow.com/ steve from virginia

    Silly article: ‘sustainable domestic consumption’ vz. China is a non-sequitur.

    Consumption is not only unsustainable but it provides no value return, it can only be sustained with ongoing debt subsidy: to date hundreds of trillions of US dollars! None of this debt can be repaid … as consumption does not provide the means to do so.

  • P Erickson

    For the economically uneducated, employment does not drive the economy, the economy drives employment!! Simply, no one hires someone if they are not making money!

    The econmy is growing, and better then predicted, which is creating profits for companies, which is the factor supporting the stock market performance.

    Political and social issues and/or biases have very little effect on the economy.

  • Steve

    I could not but help notice the omission of Student Loan Debt in the U.S. which has crossed the $1 Trillion mark. Does the author believe that this will not affect households? Or the economy since these debt holders have less money to spend in the economy.

    Also I noticed the parallels between China being debt driven but the absence of the same comment about the debt driven U.S. economy.

    The author should have addressed the U6 rate and not the phony boloney U3 rate for U.S. unemployment

  • http://www.chartimages.info Bud Wood

    With all this printed currency becoming available, it seems that the various issuing governments are "beggering their neighbors" and we’ll see theft of the savers’ (the prudent) wealth . What that means on a macro basis is that there will be little capital for new enterprises and new ideas.

    So, be ready for the ssame old thing; I think thet it’s called "suffer-flation" where only those on a governmental gravy train suffer.

  • http://none patrick o’ sullivan

    why do you have nothing about gold.

  • http://srpskaekonomija.blogspot.com Caslav Kuzmanovic

    O.K.

  • http://www.bloei.se Thomas Lapperre

    Interesting article, Ronan. Problems in Europe are far from over, as Southern European countries are having a 50% unemployment benefit among the young people. This group isn’t seeing things much more positive in North Europe with a large aging population that is now going on pension. The younger generation is faced with ever increasing pension costs, which lowers their own expectation of pension immensely, increased healthcare costs, and increased debts not only because of their own governments decisions, but also those made by the EU. In short: Europe is facing a huge braindrain as young people go for greener fields.

  • Malcolm Hume

    It’s amazing how many people actively want America and the US economy to fail, simply because they do not like the current president. The US economy has been improving ever since Obama’s Keynesian stimulus, and the Eurozone’s economy is faltering because of conservative austerity measures which failed to help the economy in any way.

  • http://www.winetours.co.uk Tim

    No mention of the non-Euro Zone Europe, a bright spot (especially the UK) nor of the rest of Asia besides Japan and China, nor the rest of the world besides the USA. Sorry but this report is a bit ‘light’ for GEO politics.

  • mike

    if you look at the "partner" section then it is clear that this is indeed liberally biased…for example the corbett report is ground zero for 9/11 conspiracy theory lunacy…

  • Ed Matluck

    This is all nothing new. It is straight consensus analysis easily available from Roubini, the IMF etc. What’s your contribution.

  • John

    After reading your ”Forecast 2014 ; Economic Trends ” that was enough for me.

    No thanks, enough is enough.

    You still are dreaming and forgot about the global indebtedness.

    John

  • Publius

    I felt like I was reading a campaign statement from the left-wing of the Democrat party. You have lost all credibility and I will be removing you from my distribution list. Shame on you for distributing unblanced messages as actual fact. Keep your progressive (defined as march to sociallism) propaganda in Canada.

  • T. Davis

    Pretty much agree with M. Lawrence above on the 7% figure it is really closed to about 12-13%. also ignored in the forecast is Obama’s continuing plans for "income equality" wherein the Dems have NO PLANS to grow the economy rather their plan is merely to divide up the existing pie into ever smaller and smaller pieces in their effort to redistribute income/wealth. This is likely to have a huge impact on those who actually create jobs and grow companies. The general ignorance of basic economics of this administration is stunning.

  • Justin Kinkade

    "A potential risk to growth exists in the introduction of a 3% sales tax increase which may dampen economic activity. Abe has promised further stimulus to offset any negative impact from the tax; a strategy which should prove successful" – What I’m reading here is the Gov is taking money from the citizens only to put it back into the economy in a form of their choosing. Why not let the citizens keep their own money and let them decide where it should be spent or does the Gov know best?

  • http://NA Denny

    The economy is not growing ecept in Democrats minds. millions have simply gave up, after two, three years of unemployment. I expect more pensions to be lost this year, in bankrupt cities, counties and (or) States, which are not protcted by Federal rules. Some already have been lost. I also expect massive voter fraud in the 2014 elections. I expect many,many, more illegal executive orders, that Rhino Republicans will do nothing about. I expect many, many, more Obama lies, Hilary lies, Reid Lies, Scumer, Peloski and Bidden lies. Eric Holder lies. I expect even lower moral in the military. Our wonderful Country is sinking because of these liars and corruption has taken over. And we do nothing.

  • http://peterverhoeff@gmail.com Peter Verhoeff

    My outlook is not as optimistic as yours. Nothing has been done to reduce unemployment, which in reality is way above 7%. Instead, the minimum wage is being increased, making it even harder for businesses to hire workers. Manufacturing jobs have been exported to China, while many service jobs, such as computer programming, are now being done from India. he US (and Europe) cannot compete with that.

    Meanwhile, the Fed keeps inflating the currency, driving up prices and reducing confidence in the dollar. Please check out my blog post, The Road to Economic Recovery at http://grandmathunder.com/2013/09/the-road-to-economic-recovery/.

  • Andres

    3 comments:

    1) I don’t find it serious to comment on unemployment figures based on different criteria without warning on those criteria. If the 12% European criteria were applied to the USA, the 7% US figure would raise up to 12-15%.

    2) I’d appreciate more details when talking about "global markets". What’s that exactly? A handful of huge investment groups and banks? A huge number of small and medium investors and business owners? Consumers all around the world? All these groups qualify as "global markets" and yet they have conflicting agendas.

    That reflects on sentences such as "the 17-country bloc emerged from recession last year". From whose point of view are you writing from? Technically, it may suit governments, but try to convince ordinary Spaniard, Greek, French or British that "recession is over in the Euro zone".

    3) I don’t see a quiet 2014 for Europe. Many governments may be punished on local and European elections. What if the UKIP comes second or close third? What if the Catalonian or Scottish referendum change the landscape? The Spaniard monarchy is losing public support fast, and political parties such as Syriza in Greece may break up the traditional bipartisan political systems in Europe. Forecasts for 2014 Europe are very, very hard to paint.

    Thanks,

    Andres

  • INCE

    Some comments on emerging markets, ie. BRICS would be helpful.
    Thanks

  • Urimas

    You are talking about planet Earth?…Or you try to envision some other Planet mimmicking Paradise?…

    Because I’m telling you, for sure, you need go back to your Paradise Planet, or , if you can’t, just check in a nuthouse here on Earth!…I hope they treat you well…

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