Millennium Post

Can world economy smile in 2014?

A series of positive economic trends in the United States toward the end of 2013 has brightened the outlook for the global economy in 2014 and beyond ,concurrently with emerging signs of improving recovery ahead in  major emerging markets and trade volumes are also expected to pick up significantly after a year of slowdown in both world output and trade.

A surprising upturn in US growth at 4.1 per cent in the third quarter of 2013, helped by private inventory build-up and stronger consumer spending, mainly in the area of health care, the sustained monthly job additions lowering the unemployment rate to 7 per cent in November, and ongoing rebound in the housing market had helped to dispel uncertainty about strength of US recovery. America’s financial markets have been buoyant in recent months and a further boost to confidence came in mid-December from the budget deal finally voted by the Congress for the two years, 2014 and 2015. The bipartisan accord on budget, for the first time in years, replaces the sharp spending cuts (sequester) enjoined earlier, with modest increases in select areas like education and research.

President Obama welcomed it as ‘a good first step away from the short-sighted crisis-driven decision making’ in the Congress that acted as a drag on the nation’s economy.  In his year-end press conference before leaving on a two-week holiday in Hawaii, the President said 2014 could be ‘a breakthrough year for America’. He did not elaborate on his own strategies after going through a troubled first year of his second term which saw his approval ratings hit a record low, especially over technical glitches holding up for two months the launch of his signature reform on healthcare.

But, he could cite progress with addition of two million jobs in 2014 and the economy growing at its strongest pace (in second and third quarters) in nearly two years, and unemployment rate falling to its lowest point (7 per cent) in five years. Deficits are down and America produces more oil at home than it imports lowering energy costs for the nation.  ‘We head into next year with an economy that is stronger than it was when we started the year’. The President will have, however, no easy time ahead as Republicans are determined to retain the House and make gains in the Senate in the midterm elections in November.

The Federal Reserve, signalling confidence in the US economy and reflecting an improved outlook for the job market, announced on Dec.18 the start of its tapering of monthly asset purchases (Quantitative Easing) from January 2014, with a modest reduction from the present 85 billion to 75 billion dollars. Depending on further progress in the economy and employment, Fed is likely to reduce the pace of purchases in further measured steps in future meetings of the Federal Open Market Committee (FOMC), according to Fed Chairman Ben Bernanke.

The Fed announcement on taper, with  its revised economic projections over the next two years along with forward guidance  on maintaining the near zero interest rate until the unemployment rate declined to 6.5 per cent,  were received in stride by global markets including India with no negative effects for economies in general, at any rate for the present.

The US economy is seen to be leading the rest of the developed world in a stronger resurgence, for the first time after the 2008 financial meltdown and the Great Recession that followed it. Prospects for 2014 also look better with the euro area emerging out of recession though its 2014 growth as projected at present (1.1 per cent) would be half of an estimated 2.6 per cent for the US economy. Fed has projected a higher 3 per cent US growth in 2014. In the developing world, China, overcoming domestic imbalances and downward pressures in trade, had stabilised its growth momentum though on a relatively lower level of 7.6 to 7.7 per cent in 2013. China ostensibly remains committed to rebalancing its economy, the second largest, with greater focus on domestic consumption. However, it also expects a firming in exports due to external demand (mainly USA and EU) and to maintain growth at not less than 7.5 per cent in 2014, as projected in the year-end UN report on World Situation and Economic Prospects 2014.

For India, growth is estimated at 4.8 per cent in the current year and should rise to 5.2 in 2014 and 5.7 per cent in 2015, according to UN estimates based on market exchange rates unlike IMF which, in PPP terms, had postulated India’s growth at 3.8 per cent in 2013 (which would be roughly 4.2 per cent at market prices) and 5.1 per cent for 2014.

These estimates may be revised by IMF when it comes up with its global update in January. Whatever the current strains that the economy is undergoing, India’s exports should do much better in 2014-2015 with the likely rise in external demand in USA and EU and its competitive exchange rate after a 14 per cent depreciation of the rupee during 2013.

Whatever the electoral uncertainties in mid-2014, India is likely to move toward a sustainable growth recovery from the lows of last two years. An improved external environment should help foster India’s financial stability and hold current account deficit at sustainable levels with a rise in export demand from USA and Euro area, the latter returning to growth from a two-year recession. But the picture is not reassuring for South Asia as a sub-region.

Growth in South Asia remained lackluster in 2013 at an estimated 3.9 per cent, nearly the slowest pace in two decades, a combination of internal and external factors hampering activity, particularly in the region’s largest economies, such as India and Pakistan, UN Report says. Growth is forecast to pick up moderately to 4.6 per cent in 2014 and 5.1 per cent in 2015, supported by a gradual recovery in domestic demand in India and an upturn in external demand. However, in most economies of the region, growth will likely remain well below the pre-crisis levels. Private consumption and investment are held back by a wide range of factors, including energy and transport constraints, volatile security conditions and macroeconomic imbalances.

On the other hand, with promising developments, mainly in USA, and a lessening of risks visible in the euro area with the improving balances in debt-stressed peripheral countries, IMF is expected to provide a more upbeat picture of the world economy for the coming two years, after subdued performance in 2013. With the start of taper by Fed and the US budget deal, IMF Chief Ms. Christine Lagarde says she now expects US economy to expand at a faster pace in 2014 and 2015.

For the world economy, UN says, growth is expected to rise to 3 per cent in 2014 from 2.1 per cent in 2013 and to 3.3 per cent in 2015.  Trade volume growth estimates are 4.7 per cent in 2014 as against 2.3 per cent in 2013 and further up to 5.2 per cent in 2015.  The US growth had averaged 2 per cent for most recent years and the earlier IMF estimate of 1.6 per cent in 2013 is being revised in the light of stronger recovery in the third quarter onwards.

The budget deal, the Fed move to taper its asset purchases from the New Year and a broad rise in consumer spending, which contributes two-thirds of GDP, would all strengthen investor confidence in the American economy.  Fiscal policy would be less of a constraint going forward, and healthy expansions are reported from sectors like energy, autos, aircraft and software. The noteworthy rise in consumer spending would be a big boost to the economy.


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