2014: Recovery or bust?

Happy new year to all my readers!

Last year's first post, conveniently called "The day after", started off with an analysis of what happened in the final hours of 2012 in the negotiations between President Obama and the Republican-led Congress. The feared fiscal cliff has been averted, however the negotiation outcomes only set the stage for further disarray that would happen 9 months later. 

This year, thankfully, starts a bit better. A budget deal in the US was reached in December, decreasing the chances of another government shutdown in January. However the debt ceiling threat still looms, but with signs of good will from the Congressmen, perhaps we're facing a less uncertain new year. 

As I've summarized my last year's predictions in my previous post, it's time to make new ones at the start of the new calendar year. 

First off, the recovery.

As the title says, next year a stronger recovery should finally kick off in most of the Western world. Emerging markets will grow too, however less dynamically than before. Their slowdown trend is likely to continue in 2014 as well. In America the energy boom will reignite the recovery momentum, in absence of further political deadlocks of course. America's stronger growth will rub off on Europe as well, so we can finally expect to see the Eurozone with positive growth rates next year (around 1%). Japan too will continue with positive results, riding on Abenomics, although it will most likely fail to lift inflation to the targeted 2% next year. 

Central banks will keep rates low in 2014. The Fed made this pledge rather clearly, even though it will reduce its bond buying program. A lot of pressure will be on the shoulders of the new chairman Janet Yellen, who is expected to expand the Fed's forward guidance - setting out clear expectations of the Fed's policy moves. Inflation will most likely still remain to be below the 2% target in the US. The BoE, faced with declining British productivity and close to 1% growth rates, will also keep rates low, as will the ECB, coping with the Eurozone's fragile recovery. The ECB will be more focused on supervision of still-endangered Euro banks. 

In June and July Brazil will host the 2014 FIFA World Cup, the most watched sporting event in the world. The favorites are the hosts Brazil (looking to win their record 6th tournament), the defending champions Spain (having won it all in the past 6 years: 2 Euro Cups and one World Cup), always dangerous Germany, last-time finalists Holland, Messi-powered Argentina, and the Suarez-powered Uruguay. I often make predictions of the World and Euro Cup winners just before the tournament, and I often come close. This time my call is Germany. But I'll go even further than this. The wild horse will be Belgium, which could reach the half-finals, where it will probably face Spain or Uruguay. In the other half-final, I see Germany and Brazil, where Brazil will crumble under pressure and lose, but will go on and win the third place playoff. 

Europe and the US

In Europe, the EU parliamentary elections in May will give rise to anti-EU parties (both far-left and far-right), mostly thanks to low turnout and discontent with economic recovery from the majority of the population. This could shake the very foundation of the European project. However, I believe this will be a clear sobering signal to the Eurozone leaders to be more focused on solving the Euro's problems. 

Despite all the problems, the Eurozone gets bigger as Latvia becomes its 18th member. This may actually contribute to lifting the Eurozone's average growth rate, since Latvia was growing at 4.5%. 

Latvia will once again be the fastest growing member at around 4% growth, while the largest negative growth will face Greece or Slovenia (around -1%). 

In the UK, growth will be better than last year, probably somewhere around 2%. It will mostly rest upon the housing recovery and an improving global environment. Next year's robust recovery may actually increase the chances of the Conservative-Lib Dem coalition in the 2015 election despite them falling short of the central goal of fixing the public finances (budget deficit is still around 6%). Another thing that will decisively shape Cameron's re-election chances will be the Scottish referendum, to be held in September. The Scots will vote no. The majority of the population is Scotland doesn't want independence, but rather more power for their country within the Union, in particular over the oil reserves in the North Sea. They will get this, but not next year. It will be interesting to see how the results of this referendum will reflect on the campaign calling for a British exit out of the European Union. This is to be decided on the 2017 referendum. 

In the United States, as mentioned above, a budget deal has been struck thus avoiding further government shutdowns. However, the deal has also avoided solving the difficult problems, such as the sustainability of Medicare, Medicaid and Social Security. The debt ceiling, which will be reached in February, is also left to be negotiated. An immigration reform is expected sometime next year, where the Republicans are supposed to cave in in an attempt to secure the Latino voters. Obamacare, the hot issue in America, will not be repealed. The individual mandate will be triggered in 2014, but despite this many will still stay uninsured. The health spending budget will rise even higher, currently around 18% of GDP (in comparison the OECD average is 9%). This will most likely hurt the Democrats in the November midterm Congressional elections, meaning that the power struggle in Washington will remain as it is. The recovery will continue steadily with the country growing at around 3%, led by a housing recovery and an energy boom.  

BRICs

Chinese growth will drop down below 7%. Will next year be the year of the bubble burst in China? Possibly. As the FT reports: 

"Bad loans are piling up, the shadow financial system is in chaos and local governments are mired in debt. Overcapacity in almost every industry is crimping corporate profits. The costs of credit, electricity, water and other key inputs are all set to rise as Beijing pursues a new reform agenda. Housing bubbles in some parts of the country have already burst, while home prices scale giddy heights elsewhere."

What could help China is the anticipated rise in consumer spending. This is why many stay optimistic about China despite the malinvestment and the housing bubble burst. The population isn't cramped in debt as was the case in the West and Japan. 

India expects general elections in 2014, where Narendra Modi is expected to become the next PM. The economy will remain to be weak, suffering from high inflation, a large budget deficit, weak currency, rising debt and loss of international confidence. 

In Brazil all eyes will be on the aforementioned World Cup, where the President Dilma Rousseff will be hoping that a positive result in the June World Cup will translate into a positive result in the October presidential elections. I don't expect the mass protests that have happened last summer during the Confederations Cup to be repeated this summer. Rather, I expect the people to voice their anger at the presidential elections. I'm not sure Rousseff will hold onto power. 

Russia too stages a big sporting event - the 2014 winter Olympics in Sochi, the most expensive Olympic games ever, at a price tag of $50bn (by comparison the Beijing summer Olympics cost $40bn). It is expected to be a combination of extravagance, glamour, waste and corruption. But also it will be a new showcase of Putin's power to the rest of the world. Expect a lot of protest surrounding the games. Only a few months later Sochi will be the host of the G8 summit. Expect even more protests then. 

Altogether 2014 will be a year of reignited strength in the West and a continuing gradual slowdown in the emerging markets. The West could actually contribute more to global growth than the East for the first time since 2007/2008. This doesn't mean that its problems are over. Not by a long shot. The recovery is not happening because of the policies enacted by the politicians, it is happening despite them (like the housing and energy booms or the reemergence of international trade). It will be bad if the politicians take this good news lightly and halt the necessary reforms. Unfortunately, it seems that this is exactly what will happen.