Global overview
Our global lead indicator suggests that the current moderate growth rate will continue in 2014 rather than shifting into boom territory. Corporate balance sheets are generally strong and economic uncertainty has faded, despite the recent wobbles in emerging markets. Furthermore, capital expenditure is expected to recover more strongly.
US
The brutal US winter weather continued through February which is likely to adversely affect data up to Easter. However, we then expect above trend growth through the rest of the year. Growth should be boosted by end of the fiscal drag and an increase in business spending.
Eurozone
The euro area continues to improve quietly. We still believe that Europe is likely to ‘muddle-through’ 2014 with a mild cyclical recovery now well underway. With encouraging evidence that the euro area has turned a corner, and inventories still lean, there are some upside risks in the short to medium term to our forecasts of a subdued recovery.
UK
Despite the recent floods and the Ukraine crisis, UK survey data remained buoyant. We remain positive on the prospects for 2014 UK GDP, but it may slow as we enter 2015 on the prospects of rate hikes and credit controls. However, our biggest concern is signs of overheating in the labour market. Recruitment difficulties are above average, and this typically foreshadows an improvement in real wages.
Emerging markets
Emerging markets faced another sizeable shock this month when Russia took military control of the Crimea region of Ukraine. Russian assets sold off sharply and the rouble weakness prompted the central bank to hike the policy rate by 1.5%. The rate hike, in combination with uncertainty created by the crisis and the US and EU economic sanctions imposed against Russia, scuppered any chance of an investment revival in the near term and GDP is now expected to grow by just 1% in 2014. China is continuing its structural slowdown, but the authorities appear to have the levers to pull to prevent a hard landing as credit growth cools.
Global inflation risks balanced:
- Modest global economy growth to contain cost and price pressures
- Low euro area inflation raises deflation threat
- Bank of Japan overshoots QE and ultimately its inflation target
Growth risks balanced:
- Reduced uncertainty triggers investment accelerator cycle
- Excessively loose developed market monetary policy versus tighter emerging market credit conditions
- Spike on bond yields chokes off recovery
- China and broader emerging market financial crisis
- Oil or food price shock
