Global economy to grow by 3.3% in 2014

The global economy is expected to grow by 3.3% in 2014, after a more modest 2.4% in 2013, following two years of “wallowing in a soft patch”, says Nariman Behravesh, chief economist of IHS Inc.

Behravesh says:

“The easing of the twin headwinds of private sector de-leveraging and public sector austerity will bolster the improved outlook, especially for the developed economies.

Many emerging economies will also likely enjoy stronger growth in 2014, pulled along by export-led growth to the United States, Europe and China. That said, the global growth rebound is likely to be quite modest.”

Global economy – the US and Europe

Behravesh predicts that US GDP growth will accelerate to 2.6% next year compared to 1.7% in 2013. He says the drag from fiscal policy will be less, while some underlying strengths – higher capital spending, oil and gas production, growing consumer spending, and housing – will become more evident.

The European rebound will continue despite some signs of weakness, but at a very moderate pace. He forecasts GDP growth of 0.8% for 2014, which will be supported by very accommodative monetary policy, governments focusing less on austerity, greater consumer spending, stabilizing labor markets, greater competitiveness in Spain, Portugal and Greece (peripheral countries), and “confidence in Eurozone politicians to manage their sovereign debt crisis.”

The United Kingdom and Germany will have faster-growing GDPs next year than this year, Behravesh believes, while Spain, Italy and Greece “will struggle to attain positive growth.”

China

China’s 2013 growth of 7.8% will likely increase slightly to 8% next year. If at any time in 2014 growth slips below 7.5% Behravesh believes the Chinese government will apply additional moderate growth stimulus. Stronger stimulus would be applied if growth dipped below 7%. China, with its aging population, rapid credit growth, an apparent housing bubble, and rising levels of debt needs growth well above 7%.

Global economy – predictions for 2014

IHS also makes the following predictions regarding the global economy:

Other emerging markets will have see GDP growth of about 5.4% in 2014., compared to 4.7% this year. The Eurozone will no longer be a drag, China’s growth will be stronger, resulting in better export markets for emerging economies.

Unemployment will remain high in the advances economies, falling slightly from an average of 8.1% this year to 7.9% in 2014. Demand for labor will be weak as productivity rises and cost-cutting “will continue unabated.” Unemployment in the United States is expected to fall to 6.6% in 2014 compared to 7.5% average for 2013.

Commodity prices will do the same in 2014 as in 2013, “go nowhere as gradually strengthening demand is matched by higher production and ample inventories.”

Central banks – the US Federal Reserve will start scaling back the stimulus no later than January 2014, while other central banks will either take a wait-and-see approach or provide more stimulus.

In the second half of 2014 the Bank of England will probably raise interest rates. The European Central Bank “will probably engage another round of Long-Term Refinancing Operations.”

The US federal budget, which stood at $1.3 trillion in 2011, is expected to remain unchanged in 2014 compared to 2013 at just under $700 billion. “Easing fiscal pressure will also be evident in Europe and many of the Eurozone’s crisis economies will be given a little more time to meet their fiscal targets.”

US dollar – As US growth will be accelerating and the Fed is likely to remove stimulus before other major central banks, the IHS sees the dollar gaining value against a basket of hard currencies in 2014.

Upside and downside risks for the global economy:

Upside – among the advanced economies the US, Germany and the UK will have stronger 2014 growth, plus China, India and Brazil “will likely surprise to the upside.”

Downside – instability in North Africa and the Middle East, plus disappointing news from some emerging markets will hamper economic growth.

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