BLOG: Stephanie Flanders – This time it’s different
Investors are rightly cautious of anyone who makes the claim that ‘this time it’s different’. But guess what? 2014 is already different. It is already the first year, since the start of the global financial crisis, which is beginning with growth forecasts being revised up, rather than revised down. And nowhere is that more true than in the UK.
In the lead-up to recessions, we always make the mistake of thinking the good times will last forever. And then, when things turn nasty, we usually make the same mistake all over again – thinking the bad times will last forever as well.
They may be perfectly human, but both tendencies are equally irrational – and equally at odds with history. Eventually, the cycle always reasserts itself, and hopefully that is what the large advanced economies are going to see in 2014, as they finally start to play their part in sustaining global growth.
The latest summary of independent forecasts from Consensus Economics show North America, Western Europe and Japan contributing nearly 40% of the expected growth in global output in 2014. That’s up from just 25% in 2013, a year in which 40% of global growth came from China, even with the slowdown in its economy.
If those forecasts are right, Western Europe will once again fail to punch its weight – contributing only around 10% of global growth. But even that fairly meagre contribution would be better than 2013, when it barely contributed anything at all. It ought also to be a better year for Japan, assuming that their Prime Minister is able to keep moving forward with his Abenomics.
Crucially, we can also expect to see decent news out of the US, despite the best – and worst – efforts of the politicians in Washington.
The absurd arguments around the debt ceiling and talk of a US sovereign default in the autumn did enormous damage to America’s global reputation. But it doesn’t seem to have done much damage to the recovery. Neither have roughly 2.5 percentage points of GDP in budget cuts, in 2013 alone, which were another undesirable side effect of the gridlock in DC.
If the US can grow nearly 2%, in 2013, with that much demand being taken out of the economy by the Federal government, one can only wonder how fast the world’s largest economy might grow in 2014, when most of that fiscal squeeze will have gone away – and even the hawks don’t expect the US Federal Reserve to start raising interest rates before 2015, if then.
One way or another, we are likely to see the end to new quantitative easing in 2014. The Federal Reserve will stop buying bonds. But after six months of persuasion, it looks as though the US central bank has largely convinced the markets that “tapering is not the same as tightening”. Unless or until US unemployment goes well below 6%, we are unlikely to see true tightening, in the form of higher short-term US interest rates, for a good while yet.
The average of independent forecasts shows the UK growing about 2.5% in 2014 – with the most optimistic looking for 3%. I do not think that is too much to hope for, after the worst five years for the UK economy on record.
Both output and productivity are now more than 15 percentage points lower than they would be, had the UK merely continued to grow at its long-term trend rate after 2007. Some of that potential might have gone forever, but it is difficult to believe that the crisis destroyed all of it.
What will be most crucial will be the state of domestic and external demand. For the economy to maintain its momentum we need to see real wages rising, finally, in 2014, and – at the margin – businesses investing in the future, rather than simply hiring workers to meet new demand.
It’s hard to be quite as optimistic about the eurozone, which has only barely moved out of recession, in the middle of 2013, after six consecutive quarters of declining output. In the periphery economies, the job of restoring competitiveness and rebuilding public balance sheets is far from done, and very low rates of inflation going into 2014 will make that task even harder. The cost of credit for ordinary businesses in these countries is also a big concern. But with luck, even these embattled economies are now past the worst.
So, yes, the road ahead for the global economy still looks challenging; bumpy, too, especially for parts of the eurozone and many emerging markets. But that basic New Year message still stands: it looks like 2014 will be different, and for once, that’s different in a good way.
Stephanie Flanders is UK and Europe chief market strategist at J.P. Morgan Asset Management.