Summary:
– Game changers are the key elements and factors that will support or slow global growth in 2014.
– The first four game changers identified are inevitably the stabilization of growth in China, the reindustrialization of the United States, the tentative recovery in the Eurozone, and turbulence in emerging countries. For China, the challenge will be to successfully transform its economic model, while for the United States and the eurozone, the goal is to ensure recovery; for emerging markets, the challenge will be to correct internal and external imbalances.
– Three other game changers concern divergent monetary policies, particularly the role of central banks in both advanced and emerging economies, between deflationary risk and liquidity crisis.
– The last three reflect new political risks, the emergence of economic blocs and new forms of protectionism, and finally the conditions for rebalancing the global economy.
2014 is heralded as a turning point for the global economy, which is likely to see the light at the end of the tunnel after several particularly difficult years. However, not all risks have been eliminated, and 2014 will certainly be a year of recovery, but not a return to strong and sustainable growth. So what will be the game changers, the factors that will play a significant role in 2014? Ludovic Subran and the Euler Hermes economic research team propose 10 rules for understanding the economy in 2014.
Transformation of the Chinese economic model under control
At the Third Plenary Session of the 18th Communist Party Congress and the Central Conference on Economic Work, the Chinese government laid the foundations for its future reforms and set its objectives to ensure the transition of its economic model while supporting medium-term growth. However, this ambitious project will be accompanied by lower GDP growth compared to 2013, given the scale of the model’s transformation: +7.5% and +7.3% forecast for 2014 and 2015, compared to 7.6% in 2013.
Under this new model, growth will rely less on exports than before and will be driven by consumption, thanks to higher incomes and employment. The private sector’s role in the financial system will be strengthened and markets will be given a « decisive » role in the allocation of resources. This liberalization process will also affect interest rates and the convertibility of the renminbi (RMB) capital account. The latter is in line with the objective of making the RMB a currency used globally in trade and as a reserve currency.
China will also aim to strengthen its financial crackdown in the fight against shadow banking, notably by controlling local government debt and credit flows. The latter will then be redirected towards new growth drivers in order to support domestic demand in the face of the changing Chinese model.
The United States will reindustrialize with or without easy money
In view of the latest indicators and recent statistical data, the economic situation in the United States has improved slightly. This upturn justifies the Federal Reserve’s ( Fed) gradual tapering of its quantitative easing program . However, its policy remains and will remain very accommodative in 2014 in order to support economic activity.
There is little cause for concern regarding monetary policy, but much more uncertainty surrounds fiscal policy, even though tensions have eased somewhat. In 2014, the United States will avoid another shutdown, as Congress has approved the first budget in four years. However, the issue of the debt ceiling is likely to cause problems for the Obama administration as early as February.
The industrial and corporate sectors are expected to boost US growth, not only thanks to the Fed’s quantitative easing (QE) program, but also thanks to energy prices and shale gas exploitation. Energy production is indeed increasing in the United States, reducing its dependence on crude oil imports and stimulating its exports of refined products. The decline in energy costs should be a key factor in the recovery of US businesses.
The eurozone is licking its wounds and beginning to heal
The eurozone has been undermined in recent years by its high degree of fragmentation, characterized by internal imbalances (competitiveness issues and public finance slippage) and external imbalances (current account deficits). Recent improvements suggest that 2014 marks the beginning of a new era.
In the so-called peripheral countries (Greece, Portugal, Ireland, Spain), the reforms implemented in recent years are beginning to yield encouraging results. Competitive devaluation policies, made possible by a sharp adjustment in the wage bill and high unemployment, are helping to stimulate exports and reduce imports. In France, the country’s limited capacity for reform, its tax system, and the rigidity of its labor market are too much of a burden to hope for growth above +0.6% in 2014. Household consumption in Germany will contribute positively to GDP growth, with these effects being reinforced by public policies (introduction of a minimum wage, public spending on pensions).
Supplying the real economy with liquidity will be a major challenge in order to initiate a sustainable recovery in the eurozone in 2014. The actions of the European Central Bank (ECB) could prove decisive, but the urgent priority is to find a solution for financing businesses by creating structures to support the credit channel. Without liquidity, economies will struggle to restore confidence and investment, two factors that are essential for stimulating growth.
Emerging countries: between recovery and fragility
Since May 2013, emerging countries have been caught in a downward spiral, fueled by financial tensions and large current account deficits. In 2014, several countries are still causing concern, even though they managed to weather the crisis of the late 2000s relatively unscathed and drove global activity. Not all countries are affected in the same way, and two groups of countries can be identified: those whose vulnerability is determined by cyclical risk and those whose vulnerability is determined by liquidity risk.
The first type of vulnerability is based on short-term weaknesses: (i) price and exchange rate risks; (ii) risk inherent in financial assets; and (iii) dependence on the energy sector. The second category reflects an economy’s ability to withstand a liquidity crisis and depends on the current account balance and credit developments in the private sector. A group of eight highly vulnerable countries is exposed to high cyclical risk and subject to structural weaknesses: South Africa, Argentina, Brazil, India, Indonesia, Morocco, Turkey, and Venezuela.
Exchange rate fluctuations are likely to cause problems, even though the central banks of the countries concerned have been able to react quickly to prevent certain currencies from falling. This exchange rate risk will particularly affect companies exposed to foreign trade in 2014. The risk of non-payment and defaults is likely to increase if the authorities fail to maintain control of their currencies. The sector that could be most affected is construction, in the event of a rise in the prices of imported products on which it depends.
Central banks: monetary musketeers facing deflation and the liquidity crisis
As we have seen, central banks around the world have played a decisive role in curbing crises and finding appropriate solutions. The replacement of Ben Bernanke by Janet Yellen at the head of the Fed is not expected to lead to any major changes. The ECB will aim to anchor inflation expectations, with monetary policy remaining accommodative. The implementation of a new bank support program remains contingent on the results of the Asset Quality Review (AQR), to be published in 2014. In the United Kingdom, the Bank of England (BoE) will continue its highly accommodative monetary policy as long as the unemployment rate exceeds 7%. In Japan, where ultra-accommodative monetary policy is one of the main pillars ofAbenomics, the Bank of Japan (BoJ) will continue its large-scale quantitative easing in 2014.
In 2014, the central banks of advanced economies will have to deal with the deflationary risk that has been looming since 2012, following the gradual decline in inflation. This phenomenon can be explained by the fall in commodity prices (which will remain stable in 2014), the appreciation of the dollar following the Fed’s tapering, and , more particularly in the eurozone, by rising unemployment and the decline in credit. As the risk of deflation poses a real threat to these economies (particularly to the recovery and the sustainability of public and private debt), central banks will have to take appropriate measures in 2014 to remedy the situation while guiding expectations.
In emerging countries, the risks are different, but they will also require intervention by central banks. Problems related to exchange rates, whether due to the slowdown in the Fed’s easing program or the considerable current account deficits of some countries, will require monetary policy to be very vigilant and responsive in 2014. Central banks have a twofold objective: they will need to cover external financing needs (especially in emerging Europe) and maintain exchange rates while containing inflation (mainly in Latin America).
Political and social risks, the emergence of blocs, and the rebalancing of the global economy
Political and social risks are unlikely to spare any part of the world in 2014. In developed countries, these risks will mainly be linked to the results achieved following the implementation of numerous reforms in recent years. If the recovery is slow to materialize, it would not be surprising to see the populations of the countries concerned expressing their discontent. Elections are also scheduled in emerging countries (South Africa, Brazil, India, Indonesia, Turkey, and Ukraine), where tensions may be high. However, the regions that will be most affected by political and social unrest will remain North Africa and the Near and Middle East, where conflicts (geopolitical and/or religious) are undermining the economy.
The emergence of new blocs (the Pacific Alliance in South America, ASEAN in Southeast Asia and, to a lesser extent, the GCC in the Arabian Peninsula) could in future encourage a new form of protectionism, as the countries in these new blocs seek to boost trade between themselves. Their goal is to remove the remaining trade barriers and create platforms that promote regional integration, both commercially and financially.
Currently, advanced and emerging economies contribute almost equally to global growth (55% in 2014 for emerging countries). At the same time, living standards will continue to rise in emerging countries (e.g., Slovenia, Malaysia, Chile, Uruguay). The rebalancing of the global economy in 2014 will require greater political and institutional stability in emerging countries, in order to be more robust and take advantage of their potential while reassuring investors.
Conclusion
In 2014, advanced economies will continue to « wean » their public finances and monetary policy, while emerging countries will once again face their demons: imbalances causing devaluations and capital flight. Even though new countries are added to the list of high-growth markets every year, risks remain for investors and exporters. What about companies facing these country risks? The risk of a sudden withdrawal (credit crunch, soaring risk of non-payment, confiscation, and expropriation) seems to have been averted, but they are running out of time to restore their margins, finance their investments, and improve their growth prospects.
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