The global economy is picking up pace in the second half of 2014. One of the key characteristics is that growth is being driven by advanced economies as risks are on the increase in emerging markets. The outlook for the five largest developed markets is mixed with the best performance expected in the UK while France, Europe’s second largest economy, battles economic stagnation which is acting as a drag on eurozone potential. Developed economies face key challenges including low inflation, a threat of deflation and persistent unemployment in some countries. Furthermore, rising geopolitical tensions around the world could throw the global recovery off course. However, the positive signs are robust including a pickup in trade, rising domestic demand and an easing of fiscal tightening measures, which were deployed to deal with unsustainable government debt levels. These factors have resulted in renewed investor interest in major advanced economies. The second half of 2014 will be dominated by debates about when interest rates will rise in these economies from their record low rates.
Real GDP Growth Forecasts for Top 5 Largest Advanced Economies: 2013/2014
Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), World Economic Outlook (WEO)
Note: Data for 2014 is forecast
1. USA: Economic recovery in largest developed market will support global growth
Despite a weak first quarter performance owing to an unusually cold winter, the USA will see its strongest economic performance since 2012 with real GDP growth of 2.0% predicted for 2014. Job creation is improving albeit with an increase in low-skilled, part-time work, and the unemployment rate will be the lowest since 2008 at a forecast 6.2% in 2014. The Fed taper or reduction in Quantitative Easing will continue with an end expected in late 2014. Despite these improvements, this is not sufficient to prevent China overtaking the USA as the world’s largest economy in Purchasing Power Parity terms in 2014.
2. Japan: Impact of consumption tax increase dominates economic performance
Japan will be one of the only major advanced economies still experiencing fiscal consolidation for the remainder of the year. In June 2014, the government announced the third and final arrow of Abenomics (measures introduced since 2012 by Prime Minister Abe to stimulate the economy) focusing on structural reform with targets including Special Economic Zones and a reduction in the corporate tax rate. However, the impact of the consumption tax increase from 5% to 8% in April 2014 will dominate Japan’s economic performance over the course of the year. Q1 real GDP growth quarter-on-quarter (q-o-q) was the highest in nearly three years as spending increased ahead of the April consumption tax hike. However, this is a one-off factor and we expect an economic decline in Q2 q-o-q in real GDP growth with expansion not returning until the final quarter of 2014. However, in a country plagued by years of deflation, the annual inflation rate will be 2.2%, also a result of the tax rise.
3. Germany: Europe’s largest economy bucks eurozone trends
Euromonitor predicts that German real GDP growth for 2014 will be double the eurozone average at 2.0%. Domestic demand will be the main driver of growth as the economy benefits from an environment of low inflation and unemployment levels (forecast 5.1% of economically active population in 2014). As global trade improves, this will benefit Europe’s largest exporter although the monthly performance of exports has been volatile and German exports will continue to be hampered by economic sanctions on Russia owing to the Ukraine crisis. Germany is Russia’s single-largest import partner after China while Germany is dependent on Russia for natural gas.
4. France: Economic stagnation, high unemployment and record government debt hinder potential
Economic stagnation in France is acting as a drag on eurozone growth while frequent strike action and protests make it very difficult for the government to enact reform. Domestic demand is weak with unemployment still in double digits at a forecast 10.2% in 2014, owing in large part to a very rigid labour market. The French general government budget deficit is breaching EU limits of 3.0% of GDP although the government has committed to bringing it below this level by 2015. However, the IMF forecasts the public debt will hit a record high in 2014 of 95.8% of GDP. The government has promised tax cuts including payroll taxes for businesses and tax relief for low income households which should result in a mild pick up in the second half of the year.
5. UK: Set to be the fastest-growing major advanced economy in 2014
The UK is the star performer of the G7 with real GDP growth of 2.9% expected, which will be the highest of the major advanced economies in 2014. Like Germany, domestic demand is performing strongly and the economy will surpass 2007 levels for the first time in 2014 in real terms. The unemployment rate has dropped below the 7.0% mark, which is what the Governor of the Bank of England stated as the threshold when they would consider an increase in interest rates. The outlook is not without risks as a year before the general election, political uncertainty may impact confidence while many analysts are concerned about a house price bubble as house prices have surpassed pre-crisis peaks. Euromonitor believes that as mortgage lending measures are tightening, this will help prevent overheating. I believe that the UK will be the first major advanced economy to raise interest rates from their record low rates before the end of 2014.