THE year 2014 will be a banner year for the world economy with moderate to vigorous economic growth, low inflation, and decent employment growth in most countries. However, there are some uncertainties looming in the horizon, particularly the prospect of uneven recovery in Europe, a slim, however, remote, chance of an escalation in tensions in the Middle East and East Asia, and the continuous tug-of war between US Congress and President Obama over debt ceiling and budget negotiations that have the potential to bring the global economic recovery to a screeching halt. Let me elaborate.
Forecasts for world economic growth have been upbeat in recent months although some international agencies and forecasters have been soft-pedaling the strength of GDP growth. The Organization for Economic Cooperation and Development (OECD) which consists of USA, Japan and most European countries, lowered its GDP growth forecast for the world economy from 4% to 3.6%. Other international agencies, particularly the World Trade Organization (WTO), World Bank/IMF, and the United Nations World Economic Situations and Prospects 2014 (WESP) report have echoed a similar trend for GDP growth based on slower growth in 2013 than originally forecast and the weaker performance in developing countries. This is based on disappointing performance by the countries banded together as BRICS (Brazil, Russia, India, China, and South Africa) which have not had a stellar year in 2013, as originally expected. “Growth in Brazil has been hampered by weak external demand, volatility in international flows, and tightening monetary policy”.
China has barely managed to hold its own, and could experience a slow down if it fails to address many of its problems (internal debt, real-estate bubble, and monetary policy), but could still show growth of 7.5% next year. India's economy is in the doldrums, and is beset by large current account and budget deficits complicated by high rate of inflation. While India's and Russia's GDP is expected to recover next year, the rate of growth at 5% and 3% respectively will not give the world economy the boost that might come from these countries. It is in this context that US and European economies are pivotal in providing the stimulus necessary to keep the world economy on an even keel.
Having aired my reservations, I still expect the year 2014 to be one of the best in recent years. All indications are that global inflation will be low, given that oil and commodity prices remain stable, and barring any major external shocks, such as war, closure of shipping routes, or an open pitched-battle between the Democrats and the Republicans in the USA.
Growth: Most economic models predict that world economic growth will accelerate to the 3.2% to 4% range. These forecasts have emanated from the Conference Board, IMF Economic Outlook, and Wharton econometric models. A caveat is in order. When economists make forecasts they make certain assumptions about the parameters: price of oil, budget deficit, unemployment rate, etc. This year, while it is expected that there will be less volatility, countries where economic growth are somewhat uncertain are China, India, and Japan. In the USA, Congress and President Obama are at cross-purposes, which can be expected to continue as each tries to gain political advantages and that inevitably impacts the economy.
In the European theatre, while France and Germany have had some success as they try to shore up the Greek economy and offer a lending hand to Ireland and Spain, it is not clear whether growth in the rest of Euro zone will be robust. Fortunately, and that is one reason most economists are optimistic, Greece is on the path to economic recovery and the threat to Euro, and the domino effect, has been less than in the last three years. On the positive side, Mario Draghi, President of European Central Bank, has come out in praise for the measures that the European banking industry has taken to prevent future crises that beset Spain and Greek banks two years ago.
World Trade: In 2014, I expect world trade to grow rapidly, with WTO forecasting a 4.5% growth rate, with the developing countries leading the charge both in terms of exports and imports (see Table 1). De-escalation of tension with Iran the Group of Five hunkering down for serious long term bargaining. In addition, with the Winter Olympics in Russia and World Cup Soccer in Brazil, it is expected that good vibes will prevail.
In a nutshell, my key predictions for the year 2014 are:
1. World economic growth will accelerate and may even reach the 4% level.
2. Europe will recover from the sluggishness and see robust job growth.
3. Developing countries will lead the recovery of world trade and provide a key market for EU countries.
4. Commodity prices, particularly of oil and gold, will experience a slight downward pull.
The writer is an economist and lives and works in Boston, USA.