New Macro Forecast: Brightening outlook, but heavy clouds over Club Med
We continue to see signs of a global recovery led by the emerging economies around the Pacific. But it is less pronounced than the recovery more immediately after the global financial crisis. Capacity utilisation in Asia is already high, which at some point will prompt policy changes in a more restrictive direction. Meanwhile, Europe remains burdened by the unresolved problems in the eurozone.
By and large, we expect the global recovery that began after the slump induced by the euro crisis to continue. The momentum is primarily due to the emerging economies in Asia and across the Pacific. In the US, exports are solid, helped by the weak dollar and strong demand abroad. There are indications that some of the activities of US companies are being moved back home as the American cost level becomes more attractive. There are also bright spots in the housing market. All this together suggests that the US will weather the negative impulses stemming from the gradual pullback of fiscal stimulus. Looking ahead, we expect the Fed to gradually scale down its expansionary policies, which suggests a comeback for the dollar.
As for China, the weaker than expected growth at the beginning of this year was met with some concern among economists, as well as the market. However, we are less concerned about the risk of a material slowdown. Underlying trend growth may be a notch below what we have become accustomed to in recent years, but a more significant downward revision to China’s growth prospects does not seem warranted. We also think that the economy is responding to the authorities’ more expansionary policy stance. Against that background, we expect the economy to continue expanding at a fast pace. At the same time, it is important to recognise that there are more binding supply-side constraints than before. In China, as well as in other Asian emerging economies, capacity utilisation is already high. That increases the risk of bottleneck problems and increased inflationary pressures. We think that policymakers will most likely have to focus more on these challenges relatively soon. The economy may therefore peak in 2015.
Emerging economies in other parts of the world should also perform relatively strongly. As in Asia, the authorities in Brazil and other Latin American countries have met the slowdown with policy stimulus. We think that these policy initiatives are impacting growth in the near term in a positive way. But we also think that, as in the case of Asia, inflationary pressures are gradually building. Policies will have to be adjusted to deal with that relatively soon. The only region in the emerging universe that deviates substantially from this general picture is Eastern Europe. Russia, the world’s primary energy producer, is keen on capitalising on strong Asian growth, but it has failed to diversify its economy much, something that will hold back growth ahead. The problems are more acute in the eastern EU countries, as they are much affected by the problems in the eurozone. We see limited scope for expansionary policies in most of these economies and expect very low growth or stagnation at best for the time being.
The eurozone is, as before, the weakest region of the world economy. We still do not detect a real strategy to deal with the deep-seated problems of the crisis economies. In any event, it will be hard for those countries to significantly improve their competitive position while remaining in the currency union. In our view, the possibility of exits at some point still cannot be ruled out. The eurozone is becoming increasingly polarised. Germany, the strongest economy, is increasingly delinking from its weaker neighbours, along with countries such as Finland and the Netherlands. All the while, France is becoming more and more like a member of the crisis-ridden Club Med. Apart from much better domestic fundamentals, Northern Europe is vastly better at taking advantage of the global growth themes that are unfolding. The ECB is not free to move as aggressively as other central banks, but it will still be influenced more by the weaker south than the stronger north when it determines its policy stance. That should favour the dollar.
In many ways, the situation in the UK is similar to that of the eurozone’s crisis economies. It is worse in the sense that the UK has in the past depended so heavily on its large financial sector, a business model that is now under pressure. But it is better in the sense that the British authorities are able to pursue economic policies that are more suitable to the country’s economic predicament. The balancing act between fiscal consolidation and expansionary monetary policy remains. Like the Fed, the Bank of England has moved aggressively to stimulate the economy. So far, the recovery has been somewhat disappointing since the financial crisis. However, it takes time to develop new sources of growth and the country’s proximity to the continent complicates this challenge.
In Japan, authorities have now firmly opted to follow in the footsteps of the Fed and the Bank of England by massively cranking up asset purchases to boost activity in the economy and escape the deflationary spiral so pervasive for many years. Any other country with the same problems as Japan – a shrinking population, climbing debt, no growth and structural rigidities – would most likely face severe market scepticism. But in Japan’s case, it could turn out well in the end given its excellent export corporations and huge savings.
The Nordic countries are generally well positioned to benefit from global economic trends. We think that Sweden’s stronger export markets, along with expansionary fiscal and monetary policies, will propel the economy forward during the next couple of years. Despite threats from abroad and volatility in financial markets, we expect confidence among firms and households to gradually strengthen as the risk of major setbacks recedes. The limited increase in unemployment more recently suggests that the economy remains fairly resilient. To a significant extent, companies have chosen to retain their employees in the face of temporary fluctuations in demand. The other side of this coin is that the potential for more jobs and lower unemployment is probably fairly limited. Against that background, the Riksbank will eventually choose to hike its policy rate to prevent bubbles from arising, but the likely ultra-low ECB rate during the next five years implies that it is very difficult to tighten enough to stop further credit expansion and rising prices in the housing market.
For more information, please contact:
Jan Häggström, Chief Economist, +46 8 701 10 97, +46 70 761 43 66
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