- Expert Roundup
- CFR fellows and outside experts weigh in to provide a variety of perspectives on a foreign policy topic in the news.
The International Monetary Fund expects the growth of the global economy will accelerate to 3.6 percent in 2014 from 2.9 percent in 2013. Five top economic experts offer insights on how to read trends in different regions.
Developing economies will likely enjoy relatively high growth in 2014, while the United States will continue with real growth and Europe’s economy will expand very slowly, says CFR’s A. Michael Spence. Moody’s chief economist Mark Zandi expects the United States to experience its fastest growth in a decade, driven by a reduction in fiscal austerity, a resurgent housing market, and the "superb condition of American corporate, bank, and household balance sheets."
Europe is growing, and capital is beginning to return, which has made policymakers "buoyant," says CFR’s Robert Kahn, but officials face the challenge of bolstering the growth rate "before markets again lose confidence in the reform process."
Well-managed Latin American countries that depended on abundant inflows of foreign capital will have to adjust their growth rates of consumption, investment, and public spending, says Ernesto Talvi of Brookings. Carnegie’s Yukon Huang says China can reach a more sustainable growth path if it deals with its debt problem and boosts productivity.
The 2014 global economy is likely to see a reemergence of the post-crisis pattern of relatively high growth in the developing economies, a continuation of real growth in the United States, and very low growth in Europe.
The U.S. economy is growing at 1.5 to 2 percent in real terms, led by a flexible private sector shifting toward external demand in the tradable sector. Tail winds are coming from growth in the emerging markets (especially China), low-cost energy in shale gas, and extensive deleveraging in the household and financial sector. Fiscal drag from government persists, and the pattern of public-sector underinvestment will remain, diminishing longer-term growth potential.
"[S]tructural rebalancing in Europe will take time and prospective growth will be low in and beyond 2014."
In Europe, the ECB has stabilized sovereign debt markets and systemic risk is for now substantially reduced. But growth will not follow easily. Most of the south of Europe has nominal unit labor costs well above Germany’s post-reform levels, and the process of reconvergence with a common exchange rate is slow and difficult. Reforms to increase structural flexibility and accelerate a structural shift toward the tradable sectors have been limited. The net result is that structural rebalancing in Europe will take time and prospective growth will be low in and beyond 2014.
China has announced an aggressive and credible reform program, emerging from the Third Plenum in November. If it is followed by an equally aggressive program of implementation in 2014 and beyond, the growth pattern will start to shift to a new sustainable one consistent with the higher income levels in the economy. Recovery in the advanced countries will eventually restore some growth potential coming from the tradable sector, but probably not in 2014 with the huge European market treading water.
Other major emerging economies, especially those with current account deficits and a pattern of reliance on cheap foreign capital, experienced some instability during 2013 as a result of the tapering announcement and high-speed capital outflows and attendant exchange rate volatility. Corrective action may slow them down into 2014, but they will return to higher growth in the longer run, with China serving as a tail wind.
African countries have been quietly impressive over a decade and through the advanced country crises. This seems set to continue in 2014 and will not be overly dependent on natural resource prices and markets. These so-called "frontier" markets, while not huge in aggregate size, are emerging as resilient star performers.
European policymakers are buoyant. The urgent sense of crisis has receded, early signs of growth have appeared, and capital is beginning to return. But Europe is not out of the woods, and the risk that the crisis could return is higher than is commonly understood.
Euro area growth is on track to reach 1 percent next year, following two years of decline. Continued bank deleveraging, an uncertain global growth outlook that will restrain exports, excessively tight macroeconomic policies, and an incomplete framework for monetary union provide powerful headwinds to recovery. Stronger demand is needed to boost growth, and a relaxation of fiscal austerity would be welcome in this regard. The European Central Bank (ECB) also will need to do more to spur new lending, particularly for small and medium enterprises in the periphery, and consider full-scale quantitative easing.
The problem with this forecast is that growth at this level is insufficient to reduce high levels of unemployment, which have reached 26 percent in Spain and 12 percent for the euro area as a whole. Youth unemployment, which averages nearly 24 percent for the eurozone and exceeds 35 percent in several countries, represents a critical threat to Europe’s future.
"European leaders need to win back their publics and make a better case for a faster move to economic and political union."
Banking union will be the focus of policy efforts to advance monetary union in 2014. The ECB-led stress test, essential in efforts to restore confidence in Europe’s banks, will need to navigate a narrow path forward: too soft and the credibility of the ECB could be irrevocably damaged; too tough and the resultant financial stress could turn today’s green shoots brown in a hurry. Market pressures could return quickly if countries were seen to be abandoning their commitment to reform and financing gaps were to reemerge.
Perhaps the more serious challenge to Europe in 2014 is political. Polls show that austerity is undermining the readiness of Europeans to accept the deeper union that is needed to redress Europe’s economic woes. Parliamentary elections in May are likely to bring a strong antiausterity vote. (A euro-skeptic parliament, in addition to being entertaining to watch, could set back efforts to negotiate a transatlantic trade agreement.) Governments in periphery countries such as Greece and Portugal may find it increasingly hard to sustain support for their adjustment programs.
The challenge, therefore, is to restore growth before markets lose confidence in the reform process again. European leaders need to win back their publics and make a better case for a faster move to economic and political union. Failure to do so could make 2014 the year the crisis returns.
Latin America, particularly countries such as Brazil and Argentina that are commodity-exporting and less dependent on the U.S. economic cycle, have had close to a decade of exceptional growth, doubling the region’s long-run average. This period of exuberance was underpinned by sound macroeconomic policies, but largely propelled by cheap and abundant inflows of foreign capital and high commodity prices. High growth and active redistribution policies made possible by plentiful fiscal resources led to a 13 percentage point decline in poverty rates in Latin America, a 5 percentage point decline in extreme poverty rates, and the emergence of an incipient middle class.
Since mid- to late 2011, however, Latin America’s growth rates have cooled substantially as growth in important emerging economies lost steam (in particular, China’s growth rate declined from previous skyrocketing levels of 12 to 7 percent) and commodity prices weakened. More recently, international financial conditions have tightened—sending shivers through emerging markets—since the Federal Reserve announced the possibility of a gradual withdrawal of monetary stimulus. As a result, international financial and capital resources are expected to become scarcer and more expensive.
"Countries that are less well-managed economically, such as Argentina and Venezuela, are already in crisis mode."
Less abundant and more expensive foreign capital and financial resources imply that countries such as Brazil—which are spending in excess of their income and financing that excess with inflows of cheap foreign capital—are soon due for an adjustment in the growth rates of consumption, investment, and public spending that will keep growth rates of the economy in check. Countries that are less well-managed economically, such as Argentina and Venezuela, are already in crisis mode.
Policymakers in the well-managed countries of the region will have to face significant economic challenges stemming from a more adverse external environment and stricter financial constraints. These challenges, especially reigniting growth through domestic transformations, are politically complex and take time to produce effects (e.g., education reform in Mexico). Preserving macroeconomic stability and fiscal probity at a time when a dissatisfied electorate (with high expectations due to a decade of very high growth) will pressure governments to accommodate immediate popular demands at the expense of sound policies. How these tensions are resolved will be crucial in determining the economic prospects of the region in the coming years. For better or worse, in the next decade we will witness the emergence of a very different Latin America.
The Third Plenum of the Chinese Communist Party’s Central Committee laid out in November a bold policy framework for reaching a more sustainable growth path. These policy changes are essential as China approaches the level of income at which many other rapidly growing developing countries experienced precipitous growth slowdowns, the so-called middle-income trap. Going forward, if China hopes to evade this "trap" and maintain growth of 7 percent for the rest of the decade, it will have to address its growing debt problem and significantly increase productivity.
China’s $600 billion 2008 stimulus package pushed up its total debt level by 50 percentage points to more than 200 percent of GDP. Given China’s high savings rate and huge level of reserves, this burden is manageable provided that the targeted economic growth rate can be sustained. Thus a major concern addressed in the Third Plenum was the strengthening of the fiscal system so that local authorities would no longer have to rely on bank credit to finance their basic expenditure needs.
"Fiscal reforms and reduced dependence on banks will improve transparency and promote accountability."
But more challenging is increasing productivity, since China’s past reliance on ever-increasing investment rates and ready access to low-cost labor is no longer tenable. The two most promising areas of productivity-boosting reform are those that will facilitate a more efficient urbanization process, allowing the economy to benefit from the massive supply of labor still trapped in low-productivity rural activities or smaller cities and increasing the role of private firms, whose investment returns are twice as high as state-owned enterprises.
While these macroeconomic problems are high on the policy agenda of senior leaders, the average citizen is more preoccupied with issues of social justice, corruption, and the environment. Thankfully, many of the actions highlighted at the Third Plenum also feed into the wider changes needed to address these politically sensitive concerns. Fiscal reforms and reduced dependence on banks will improve transparency and promote accountability. Rolling back the power of state enterprises and streamlining government procedures will restrain rent-seeking activities and expand opportunities for private firms. Better-managed urbanization will strengthen the voice of the middle class and improve the environment while also boosting productivity.
Here’s an intrepid forecast: In 2014, the U.S. economy will experience its fastest growth in a decade.
Supporting this optimism is the fading of fiscal austerity. Under current law—if Congress makes no substantive changes to taxes and spending—headwinds from fiscal policy will diminish rapidly. Lawmakers will again need to agree on keeping the government open and raising the Treasury debt limit, but they seem likely to do so after their earlier brinkmanship brought a negative political reaction.
It would be wonderful if Congress and the Obama administration could undertake substantive entitlement and tax reform, but this seems unlikely, and it isn’t necessary in the near term to allow the economy to improve; our long-run fiscal problems will come to a head in the next decade. As long as lawmakers do no harm, which is a reasonably low bar, fiscal policy will quickly become less of a drag on growth.
"The only missing ingredient to a stronger economy is confidence."
The housing recovery should also power stronger output growth. Simple demographics support a pickup: The current pace of construction is far too slow to accommodate newly formed households, replace damaged or obsolete structures, and meet demand for second homes. Housing was vastly overbuilt during the bubble, but it will soon be undersupplied, suggesting that construction will be ramped up significantly across much of the country.
An acceleration in housing hinges on the Federal Reserve’s ability to successfully match the pace of future interest rate increases to an improving job market. Home sales won’t be dented by higher mortgage rates if brisk hiring and a falling unemployment rate lift homebuyers’ income and confidence. For the Federal Reserve to gracefully unwind its extraordinary monetary stimulus policies is no small order, but it is doable, and the most likely outcome.
Most of all, optimism about 2014 is based on the superb condition of American corporate, bank, and household balance sheets. Businesses have reduced their costs and are enjoying record profit margins. Banks have recapitalized and are highly liquid. And households have reduced their debt loads and locked in record-low interest rates.
The only missing ingredient to a stronger economy is confidence. It is hard to know what will lift spirits, but with the pain of the Great Recession diminishing and Washington’s standoff expected to fall off the front pages, chances are growing that this will happen in 2014.