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Euler Hermes global economic outlook: 10 game changers for 2014 Print E-mail
Tuesday, 04 February 2014

Internal imbalances between Eurozone countries have reduced so that the ball is now rolling, but the Eurozone must keep its eye on the ball according to Euler Hermes, the world’s leading provider of trade credit insurance.

The United States will also re-industrialise, despite the vagaries of the Federal Reserve’s easy money policies. These are just two of the top 10 economic “game changers” Euler Hermes has forecast for 2014. In addition, developed economies in North America, the eurozone and Japan should contribute more to global growth, while major elections could create uncertainty in key emerging countries.

“For the first time since the 2008-09 we are seeing greater balance between the Eurozone countries, bought about by significant reduction in account deficits in Greece, Portugal and Spain in particular,” said Ludovic Subran, chief economist and director for Economic Research at Euler Hermes. “Weaker imports have resulted in improvements in trade balances, and renewed competitiveness saw a pick up in exports. Fiscal consolidation has significantly reduced public refinancing needs and salvation is expected from growing exports especially from countries whose export companies have restored competitiveness with the necessary wage and staff adjustments. This rebalancing process will be supported by European leaders like Germany, which should see GDP growth being driven by household spending in response public policies, such as the introduction of the national minimum wage.”

Mr Subran said that globally, 2014 will still be a challenging year: “However, with the improved prospects for advance economies others will begin to gain more traction and activity will be more evenly distributed.”

To learn more about Euler Hermes’ perspective, view the full report, “Top Ten Game Changers in 2014.”

Game changer #1: China’s transformation will be under control

The Asia-Pacific region is entering a new “3S-Cycle:” Solid, Sustainable, but Slower. While the Asia-Pacific region will remain the world’s economic driver and China its main growth engine, Asia will grow slower (+4.7% per year) compared with the previous decade (+5%). However, this growth will be more sustainable with resilient intra-regional trade acting as a cushion.

Game changer #2: The United States will reindustrialize with or without easy money

In the United States, fiscal uncertainty has eased with the Federal Reserve’s continued commitment to easy money, albeit at a smaller scale. The labor market has improved, as has the political environment. The continued energy revolution in shale gas and crude oil will flood the market with cheap energy. As a result of all these dynamics, the manufacturing, auto and housing industries are likely to boost the economy to a 3% growth rate in 2014, compared with 1.8% in 2013.

Game changer #3: The Eurozone must keep its eye on the ball, but the ball is rolling

2014 GDP growth is expected to be positive in the eurozone at 0.9%. The two key growth drivers are southern countries’ ability to further implement structural reform and current financing mechanisms remaining intact. The ECB’s new Very Long Term Refinancing Operations (VLTRO), for example, should help stimulate bank lending into the real economy.

Game changer #4: The monetary musketeers and Japan’s d’Artagnan

Continued support by central banks in the U.S., eurozone and Japan will be needed to keep the recovery going. In the U.S., progressive tapering and improved forward guidance will not likely endanger a recovery. Similarly in the eurozone, explicit guidance and targeted liquidity will drive growth. In Japan, “Abenomics” – continued accommodation on monetary policy – expansionary fiscal policy, and structural reforms will determine the direction of that country’s growth.

Game changer #5: “It's the price, stupid!”- When disinflation matters in the advanced economies

Inflation in advanced countries has moderated since early 2012, with 2013policy changes in Japan being the exception. With China’s growth moderating, there is further downside risk to commodity prices and inflation in 2014, while stubbornly high unemployment in southern Europe will continue to put pressure on inflation there.

Game changer #6: Periphery countries – dodging the liquidity crunch, piggy-backing the recovery

In 2014, expect Latin America and Emerging Europe to benefit from a recovery in the U.S. and the eurozone and export demand to pick up. However, liquidity will be the main concern in politically fragile countries such as Argentina, Turkey, Ukraine, and Venezuela.

Game changer #7: Emerging markets, fragility is a policy thing

Policy is just as much of a concern in emerging markets as liquidity, as some countries do not have the capacity to absorb external shocks. Policy tools such as currency intervention and interest rate adjustments will be the key to surviving any kind of downturn. This type of proactive response was evident in Brazil and Thailand last year.

Game changer #8: Old and new political risk in 2014

The Middle East and North Africa will remain the regions most beset by political and social changes, with fragile political transitions underway in Egypt, Libya and Tunisia. Civil war in Syria will have contagion effects on neighboring Lebanon and Iraq. Other areas of concern include Central Asia, North Korea, Bangladesh and Venezuela. While much of these risks were previously known, upcoming elections in South Africa, India, Indonesia, Turkey and Brazil create additional uncertainties given the fickle nature of the electorate.

Game changer #9: Building blocks – a new form of protectionism

While trade alliances such as the Pacific Alliance and ASEAN community are usually considered positive developments, they face difficulties in removing non-tariff barriers. This is particularly of concern as these relationships develop. A 2013 World Bank report noted that removing supply chain barriers could be six times more effective that eliminating tariffs.

Game changer #10: Global rebalancing – don’t put the cart before the horse

While emerging markets contributed a larger portion of global GDP growth over the last decade than advanced economies, a rebalancing of that growth is taking place. Emerging markets are expected to contribute 55% to global growth in 2014, and advanced economies 45%. This is a substantial convergence compared to 2008, when the contributions were 98% and 2%, respectively. China’s economic normalization has played a considerable role in this consolidation, and keeping this balance will require strong foundations politically and appropriate structural reforms.

“While the outlook for 2014 is generally positive, it is clear that many risks remain to the global recovery,” said Ludovic Subran. “Political stability and sound policy making are equally as crucial as accommodative central banks and friendly trade relationships.”

(Source - Euler Hermes Press Release)  


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