Even though economic uncertainties and geopolitical problems have emerged, global economic growth should continue, says Richard Hoey, Chief Economist at BNY Mellon, in his Economic Update.
After an initial surge not long after the financial crisis, global growth has been sustained for several years, albeit at a sluggish pace, says Mr. Hoey.
“This has extended through the first half of 2014 since two major countries (the U.S. and Japan) were roughly flat in the first half of 2014 while the initial phase of the fragile European recovery from its double-dip recession was quite tentative,” Mr. Hoey commented.
The United States
In recent months, the US labor market has improved significantly. According to the update, the middle of 2015 will be the transition for the US from 5 years of GDP growth marginally above 2%, to three years of 3% growth in a ‘3-for-3’ pattern.
“The expected acceleration does not reflect major new sources of strength but rather the fading of several drags, including the fiscal tightening and private sector deleveraging,” Mr. Hoey said. “Thus we continue to expect an ‘eight-year economic expansion‘ (2009 to 2017) in the U.S.”
Geopolitical crises have emerged in several locations and appear to have gotten worse recently. Given the location of the Iraqi oil fields, a major disruption in the flow of oil from that part of the world is unlikely.
China, Japan and Europe
China: there has been increasing talk of a “Chinese financial meltdown” from pessimists. Mr. Hoey, however, believes GDP growth in China will continue, but probably at a more moderate pace over the coming years.
Japan: there was growth during the first quarter and likely a downturn in the second after the April consumption tax hike. The Update predicts gradual acceleration of growth during the second half of 2014.
Europe: the recovery should be sluggish but sustained. Although the conflict in Ukraine and related sanctions will likely dampen exports to Russia, Mr. Hoey predicts that GDP growth will continue expanding very moderately over the next several years.
Inflation and interest rates
Unless the inflation rate suddenly starts to rise dramatically, the Update sees the first interest rate hike in the US occurring around the middle of 2015. Mr. Hoey believes the Fed will tighten slowly initially, especially since the functioning of the money markets is going through a radical change.
Mr. Hoey writes:
“Safe sovereign debt is scarce due to limited net supply from the big four countries (the U.S., UK, Japan and Germany) exacerbated by central bank purchases which have manipulated up sovereign bond prices in some countries.”
He estimates a prolonged normalization of bond yields over the next few years as core sovereign bond markets slowly return to free market pricing with privately-financed rather than central bank-financed deficits. This will be a gradual process, he adds.
Two major central banks – the Fed and the Bank of England – are expected to tighten, while the Bank of Japan and the European Central Bank may consider further easing. The dollar will likely appreciate over time, which should help limit the speed of the cyclical rise in inflation in the United States.
Regarding energy supplies from Russia to Europe, Mr. Hoey said:
“We do expect that there will be continued worry about the flow of natural gas from Russia to Europe this winter. Those worries could hold back confidence in Europe over the next several months even if a major disruption of natural gas supplies to major European countries this winter can be avoided, which is our expectation.”
