The global economic outlook for 2014 is of strong growth, despite concerns regarding financial risks in China and volatility in some emerging markets following the Federal Reserve stimulus tapering, says Richard Hoey, chief economist at BNY Mellon in his most recent Economic Update.
Emerging markets refers to countries that are not yet advanced economies, but are not low-income countries either.
Hoey’s global economic outlook forecast economic growth for 2014 of one half to three-quarters of a percentage point faster than in 2012 and 2013. He predicts 3% growth each year for 2014, 2015, and 2016.
Hoey says:
“We believe that the Chinese government has the financial strength to absorb a substantial portion of the legacy bad debts over a period of years and to tolerate a gradual recognition of legacy bad debts in the private sector over an extended period of time. The result should be an orderly deceleration of Chinese economic growth.”
Chinese economy expected to do well
Even the Chinese economy, despite some financial risks, will probably grow by 7.5% in 2014, he adds.
Hoey continues:
“After running current account surpluses for many years, the external balance sheet of China is quite strong. It is a net international creditor, not a net international debtor. Chinese debt is largely owed to domestic Chinese lenders in an economy with a very high savings rate. The government of China has the power to decide who will absorb the losses from bad debts in vulnerable portions of the Chinese financial system and when that will occur.”
A number of emerging economies are susceptible to changes in the Chinese business cycle, which moves differently from those of the advanced economies.
Hoey says “The Chinese business cycle is out of step with the developed economy business cycle due largely to the hangover from the credit boom engineered by China after the global recession to mitigate the spillover to China from the global recession.”
Oil and energy prices
Hoey explains that energy prices are “casual” for economic growth. Energy spending takes up a major proportion of global spending.
The global economic outlook is strongly influenced by the price of energy, which is forecast to follow “a well behaved pattern.”
He explains that “Weak or roughly flat world energy prices, especially when they are due to strong supply growth more than to cyclical weakness in demand, can help support global economic expansion.”
Monetary policy expectations in advanced economies are unchanged
The Federal Reserve’s tapering of the bond-buying stimulus program will most likely continue being reduced by $10 billion every month. Any decision to pause the taper would require a “high hurdle.”
Short-term interest rates should begin to rise during the third and fourth quarters of 2015 “and additional easing from the Bank of Japan is likely to be needed later this year.
There is likely to be a slight easing move from the European Central Bank soon, Hoey believes.
Mild inventory slowdown in the US
According to Hoey, there are two types of inventory adjustments:
- When final demand falls sharply and companies are slow to adjust production, generating significant cyclical weakness.
- When the pace of inventory buildup increases considerably and then slows to a more sustainable pace. This is a milder type of inventory adjustment.
According to Hoey, the United States is undergoing the milder inventory slowdown.
Hoey concludes:
“While the fourth quarter 2013 real GDP growth should be revised downward and the first quarter 2014 growth rate may be weak, we continue to expect real GDP growth in the U.S. of about 3% in 2014, continuing at roughly the same pace in 2015 and 2016.”
Video – Richard Hoey, Sustained global expansion