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 the Council on Foreign Relations' 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.
A. Michael Spence, Council on Foreign Relations: 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.
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.
Robert Kahn, Council on Foreign Relations: 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.
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 anti-austerity 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.
Ernesto Talvi, Brookings Institution: 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.