Global economy to expand faster in 2014

MANILA, Philippines - The global economy is forecast to expand by a fasrer 3.3 percent pace in 2014 from the expected 2.7 percent this year, aided by benign inflation amid higher interest rates.

According to Marios Maratheftis, global head of macro research at Standard Chartered Bank (SCB), the gradual tapering of the quantitative easing (QE) program in the US and the economic reforms in China will usher in a better Year.

“Nothing signals this better than outgoing Fed Chairman Ben Bernanke’s decision to start unwinding QE in the US – this pronouncement is a vote for the growing strength of the US economy and shows how far the economy has progressed since the dark days of 2008-09,” Maratheftis said.

Those are likewise good signs for Southeast Asia, which have strong trade relations with China and the US, as the region is competing for foreign direct investments (FDIs) of the developed nations.

“A recovering West is excellent news for world trade and for the continued outperformance of emerging markets,” the SCB research head said.

Also, Janet Yellen’s most important action once she takes charge of the US Fed should be to orchestrate a smooth unwinding of QE without causing a sharp rise in long-term interest rates.

The SCB expects the US economy to show enough resilience for the Fed to complete tapering by the end of 2014.  With QE coming to a close, the Fed is likely to rely mostly on forward guidance to influence market rates, which may not be as effective.

As a result, Maratheftis expects interest rates to move higher in 2014. Inflation still remains benign, with the exception of a few emerging markets; commodity prices are stable; and labor markets, both in the US and Europe, remain substantially slack. Meanwhile, the Fed is likely to raise its benchmark policy rate only at the end of 2015.

Meanwhile, the acceleration in US activity and Europe’s return to growth after two years of contraction are pleasant changes for Asia, which for the past five years has been relying mostly on domestic demand and trade with other emerging markets to power the global recovery.

Reform and rebalancing will be in focus across Asia, especially China, in the coming year. Chinese Premier Li has been tasked with overseeing China’s economic rebalancing, with consumption growing in importance relative to investment. This is moving along nicely, and the recently concluded Third Plenary Session provided the clearest sign that President Xi Jinping and his colleagues in the all-powerful Politburo of the Chinese Communist Party are leading the ambitious agenda for economic and social reform.

Economies in Southeast Asia are likely to benefit from their growing competitiveness with China as a manufacturing center, enabling them to attract increased FDIs.

Urbanization, a strong driver of growth in the region, has a long way to go with the build-up of infrastructure and increased industrial activity.

Southeast economies must now be gearing up for the influx of FDIs, especially in the manufacturing side, as it prepares for the hungry Europe and US economies.

As in Asia, the resource-rich Gulf Cooperation Council (GCC) countries in the Middle East can look forward to a strong year ahead. Oil prices are likely to remain above levels that would boost the coffers of GCC governments, enabling them to use their fiscal strength to drive near-term growth and diversify their economies away from energy industries.

However, oil importers in the Middle East and North Africa face slower economic activity, rising fiscal pressures and increasing youth unemployment.

Africa, meanwhile, is likely to outperform world growth in 2014, as it has for the past decade. Resource exploration remains important and commodity output gains should compensate for weaker prices in terms of the impact on growth.

However, domestic demand remains the fundamental driver of growth across the continent.

Maratheftis said that the rise of the African consumer – spurred by an improved policy environment, stable inflation, greater savings and a more open embrace of the private sector – is being reinforced by large-scale infrastructure and resource investment, as seen most recently in eastern Africa, where governments are keen to commercialise new oil and gas discoveries.

He said all in all, 2014 should be a better year than 2013. The global economic recovery, so far shouldered by the emerging economies, is likely to broaden with the West joining in. However, the growth gap between G7 and the emerging markets is unlikely to close anytime soon.