Economic Growth to Pick Up In 2014 But Risks Remain, Warn Analysts

By Neils Christensen of Kitco News
Friday December 6, 2013 11:300 AM

(Kitco News) - Global economic growth is expected to pick up in 2014 after a sluggish 2013; however, although optimism is growing, economists and analysts say there are still risks to the world economy.

On Nov. 19, the Organization for Economic Cooperation and Development released its forecasts for the new near and according to their data, “the global recovery remains modest and uneven.”

In its report, the OECD said that global growth is expected to grow by 3.6% in 2014, up from 2013’s estimated growth of 2.7%. Although the global economy is poised to move beyond the post-crisis lethargic growth, the organization adds that growing risks in large emerging market economies (EMEs) and underlying fragility will continue to weigh on growth in the new year.

“Long-standing sources of risk, such as fragilities in the euro area banking sector and the Japanese fiscal situation, have been augmented by new concerns, most notably the possibility of significant financial instability in advanced and, especially, EMEs during the exit from unconventional monetary policies in the United States,” the OECD said in its report.

Breaking down the OECD’s forecast: the U.S. is expected to grow by 2.9%, up from this year’s GDP forecast of 1.7%; the euro area GDP is expected to hit positive growth of 1.0%, up from expected negative growth of 0.4% in 2013 – this will be the second year of negative growth for the European economy; Japan’s economy is expected to grow 1.5% in 2014, slightly down from this year’s expected growth of 1.8%; China’s economy is expected to grow 8.2% next year, up from this year’s expected growth of 7.7%.

The OECD’s outlooks are relatively in-line with forecasts from other banks. BMO Capital Markets is expecting the U.S. economy to grow 2.7% from this year’s estimated growth of 1.6%. BMO expects global growth to hit 3.6% in 2014, from this year’s forecast of 3.0%.

Sal Guatieri, senior economist at BMO Capital Markets, said that the U.S. economy should benefit from improved household finances, pent-up demand and less fiscal drag.

RBC economics expects the global economy to grow by 3.5% in 2014, up from estimated growth of 3.0% this year. Looking at the U.S. RCB expects GPD to grow by 2.6% next year, up from this year’s expected growth of 1.6%. Europe’s GDP is expected to grow by 1.0% in 2014 after expected negative growth of 0.4% this year.

According several to economists, the U.S. will continue to dominate the growth themes in 2014. The OECD and other economists have pointed out that the Federal Reserve’s plan to taper quantitative easing at some point next year could hurt emerging markets as funds dry up.

Craig Wright, chief economist at RBC Economics, said right now investors are chasing yields and willing to take on more risk, which is benefiting emerging market economies; however, he added he is seeing signs of that liquidity drying up as investors re-evaluate their risks.

Wright pointed out that RBC expects the Federal Reserve to slow down its $85 billion monthly bond-purchasing program in March and although markets are already anticipating this move, it is uncertain how smooth the transition will be.

“This is the exit period from this great experiment so there are going to be some mistakes along the way and you don’t want any small mistake being exaggerated,” he said. “We are truly in unchartered waters. We’ve never seen any central bank with a balance sheet so bloated nor have we seen so many central banks with bloated balance sheets.”

Another issue economists are watching closely is whether the U.S. can put its fiscal house in order. Wright pointed out that there is talk that the U.S. Congress could have a budget by Dec. 13 but given that the government has been without a budget since 2009, this date is viewed with strong skepticism.

“Political leaders need to ensure that the normal functioning of government is not disrupted once more early next year. Changes are also needed in budgetary procedures to prevent such disruptions from reoccurring,” the OECD said.

James Gruber, publisher of Asia Confidential newsletter, said that the monetary policy in Japan could have a major impact on the global economy, give that it has a bigger balance sheet compared to the U.S.

Gruber explained that so far the country has seen mixed results to extremely loose monetary and economic policies dubbed “Abenomics” to spur inflation and economic growth.

“The big questions for 2014 are can Japan induce further inflation and will Abe introduce more substantive reform,” he said in an email response to Kitco News. “The questions are vital for the global economy. Get it wrong and it could have disastrous consequences for Japan and the world.”

China’s economic growth is expected to remain strong compared to the rest of the world; however, the country’s performance will remain subdued compared to its historical standards. Economists at Nomura are forecasting China’s GDP to grow 6.9% in 2014, down from 2013 GDP growth of 7.6%.

Nomura added that China’s growth could be limited as the government tightens its fiscal policies and embarks on structural reforms.

Gruber said that many economists are underestimating the risks that China could pose to the global economy.

“Can China deal with its substantive credit issues without inducing a more serious economic slowdown? And can it implement structural reform without hurting the economy too much? These are big maybes and the world seems complacent about the risks,” he said.

Turing to the euro zone, although the area is expected to return to positive yearly growth, economists at Nomura said the region “will likely underperform other advanced economies in 2014.”

Although the economic crisis that gripped the European region since 2009 has started to ease, the euro zone is faced with another problem: deflation.

In a surprising move in November, the European Central Bank cut interest rates by 25 basis points, bringing its key lending rate to 0.25% as inflation remained below the central bank’s target of 2.0%.

We may experience a prolonged period of low inflation to be followed by gradual upward movements towards an inflation rate of below, but close to, 2% later on," said Mario Draghi, president of the ECB at a press conference following the rate cut. At another press conference on Nov. 21, Draghi said deflation is not taking hold in the euro zone.

“For now, the outlook does not look favorable as major headwinds remain: the nascent recovery is unlikely to pull the region away from dangerously low inflation, and game-changing policies remain elusive. The recovery will not be strong enough, in our view, to dispel deflation fears,” said Nomura economists. “As such, despite recent improving economic conditions, our forecast remains for a slower euro area recovery than the consensus expectation.”

Nomura expects the euro zone economy to grow 0.7% in 2014, after expected negative growth of 0.4% in 2013. The bank’s forecast is moderately weaker than the OECD’s forecast of 1.0% growth in 2014.

BMO economist Guatieri said that Germany’s economic growth will continue to prop up the other weaker economies; however, he added he does expect to see some stabilization in the periphery countries that could help boost the euro zone’s growth.

By Neils Christensen of Kitco News; nchristensen@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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