The Global Economy In 2014 – Slow Growth And Short Tails
Nouriel Roubini
The
global economy had another difficult year in 2013. The advanced
economies’ below-trend growth continued, with output rising at an
average annual rate of about 1%, while many emerging markets experienced
a slowdown to below-trend 4.8% growth. After a year of subpar 2.9%
global growth, what does 2014 hold in store for the world economy?
The
good news is that economic performance will pick up modestly in both
advanced economies and emerging markets. The advanced economies,
benefiting from a half-decade of painful private-sector deleveraging
(households, banks, and non-financial firms), a smaller fiscal drag
(with the exception of Japan), and maintenance of accommodative monetary
policies, will grow at an annual pace closer to 1.9%.
Moreover,
so-called tail risks (low-probability, high-impact shocks) will be less
salient in 2014. The threat, for example, of a eurozone implosion,
another government shutdown or debt-ceiling fight in the United States, a
hard landing in China, or a war between Israel and Iran over nuclear
proliferation, will be far more subdued.
Still,
most advanced economies (the US, the eurozone, Japan, the United
Kingdom, Australia, and Canada) will barely reach potential growth, or
will remain below it. Households, banks, and some non-financial firms in
most advanced economies remain saddled with high debt ratios, implying
continued deleveraging. High budget deficits and public-debt burdens
will force governments to continue painful fiscal adjustment. And an
abundance of policy and regulatory uncertainties will keep private
investment spending in check.
The Global Economy In 2014
The
outlook for 2014 is dampened by longer-term constraints as well.
Indeed, there is a looming risk of secular stagnation in many advanced
economies, owing to the adverse effect on productivity growth of years
of underinvestment in human and physical capital. And the structural
reforms that these economies need to boost their potential growth will
be implemented too slowly.
While
the eurozone’s tail risks are lower, its fundamental problems remain
unresolved: low potential growth; high unemployment; still-high and
rising levels of public debt; loss of competitiveness and slow reduction
of unit labor costs (which a strong euro does not help); and extremely
tight credit rationing, owing to banks’ ongoing deleveraging. Meanwhile,
progress toward a banking union will be slow, while no steps will be
taken toward establishing a fiscal union, even as austerity fatigue and
political risks in the eurozone’s periphery grow.
In
Japan, Prime Minister Shinzo Abe’s government has made significant
headway in overcoming almost two decades of deflation, thanks to
monetary easing and fiscal expansion. The main uncertainties stem from
the coming increase in the consumption tax and slow implementation of
the third “arrow” of “Abenomics,” namely structural reforms and trade
liberalization.
In
the US, economic performance in 2014 will benefit from the shale-energy
revolution, improvement in the labor and housing markets, and the
“reshoring” of manufacturing. The downside risks result from political
gridlock in Congress (particularly given the upcoming midterm election
in November), which will continue to limit progress on long-term fiscal
consolidation; a lack of clarity about the Federal Reserve’s planned
exit from quantitative easing (QE) and zero policy rates; and regulatory
uncertainties.
Emerging
markets’ difficult year in 2013 reflected several factors, including
China’s economic slowdown, the end of the commodity super-cycle, and a
fall in potential growth, owing to delays in launching structural
reforms. Moreover, several major emerging economies were hit hard in the
spring and summer, after the Fed’s signal of a forthcoming exit from QE
triggered a capital-flow reversal, exposing vulnerabilities stemming
from loose monetary, fiscal, and credit policies in the boom years of
cheap money and abundant inflows.
Why Emerging Markets Will Grow Faster In 2014
Emerging
economies will grow faster in 2014 – closer to 5% year on year – for
several reasons. Brisker recovery in advanced economies will boost
imports from emerging markets. The Fed’s exit from QE will be slow,
keeping interest rates low. Policy reforms in China will attenuate the
risk of a hard landing. And, with many emerging markets still urbanizing
and industrializing, their rising middle classes will consume more
goods and services.
Still,
some emerging markets – namely, India, Indonesia, Brazil, Turkey, South
Africa, Hungary, Ukraine, Argentina, and Venezuela – will remain
fragile in 2014, owing to large external and fiscal deficits, slowing
growth, below-target inflation, and election-related political tensions.
Some of these countries – for example, Indonesia – have recently
undertaken more policy adjustment and will be subject to lower risks,
though their growth and asset markets remain vulnerable to policy and
political uncertainties and potential external shocks.
The
better-performing emerging markets are those with fewer macroeconomic,
policy, and financial weaknesses: South Korea, the Philippines,
Malaysia, and other Asian industrial exporters; Poland and the Czech
Republic in Europe; Chile, Colombia, Peru, and Mexico in Latin America;
Kenya, Rwanda, and a few other economies in Sub-Saharan Africa; and the
Gulf oil-exporting countries.
Finally,
China will maintain an annual growth rate above 7% in 2014. But,
despite the reforms set out by the Third Plenum of the Communist Party’s
Central Committee, the shift in China’s growth model from fixed
investment toward private consumption will occur too slowly. Many vested
interests, including local governments and state-owned enterprises, are
resisting change; a huge volume of private and public debt will go
sour; and the country’s leadership is divided on how quickly reforms
should be implemented. So, while China will avoid a hard landing in
2014, its medium-term prospects remain worrisome.
In
sum, the global economy will grow faster in 2014, while tail risks will
be lower. But, with the possible exception of the US, growth will
remain anemic in most advanced economies, and emerging-market fragility –
including China’s uncertain efforts at economic rebalancing – could
become a drag on global growth in subsequent years.
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