After several years of unprecedented intervention from central banks around the world, the global economy is expected to experience a modest increase in growth next year. However, risks still remain as policymakers have yet to demonstrate they are capable of making a smooth exit.
The global economy managed to grow slowly in the face of many challenges in 2013, but appears set to pick up steam in 2014, according to the latest outlook from Pimco Managing Director Saumil H. Parikh. In the United States, worries over fiscal policy and higher interest rates emerged as the housing market was improving mid-year, while the eurozone remained in a recession for the year. Explosive credit growth and shadow banking become the center of attention in China, and Japan continued to adjust to their new reality of increased dependence on expensive imported energy.
“Despite the diverse nature of these challenges, the global economy was able to grow between 2 percent and 2.5 percent during the year, after adjusting for inflation, equaling its performance from 2012,” explains Parikh. “The global growth story in 2013 was closely linked to the gradual healing in the U.S. economy — see, for example, notable recent improvements in the labor market and stronger household and company balance sheets, all of which has been underpinned by extraordinary central bank policies.”
With many of the challenges in 2013 reaching a point of self-exhaustion, PIMCO expects the global economy to grow between 2.5 percent and 3 percent next year. As the chart below shows, the United States is expected to make a significant improvement in 2014, while China continues to post the highest growth, albeit at a slower pace from this year. The BRIM region, which includes Brazil, Russia, India, and Mexico is expected to grow between 2.75 percent and 3.25 percent.
The major caveat to growth in the United States is how the Federal Reserve handles an exit from extraordinary monetary actions. Currently, the central bank is purchasing $40 billion per month of mortgage-backed securities, and $45 billion per month of long-term Treasury securities. In fact, the Federal Reserve owns about one third of the U.S. bond market. It has also decided to keep interest rates at historic lows at least as long as the unemployment rate remains above 6.5 percent and inflation remains subdued.
Other major central banks are also juicing economic growth through extraordinary monetary policy. In April, the Bank of Japan announced another round of stimulus to fight deflation. The central bank’s governor Haruhiko Kuroda committed to nearly doubling Japan’s monetary base to 270 trillion yen by the end of 2014. It also set a goal of 2 percent inflation by the end of 2014. In the words of Hayman Capital Founder Kyle Bass, “The BOJ will be buying assets at roughly 75 percent of the rate of the U.S. Fed, on an economy that’s one-third the size of the U.S.”
The European Central Bank, led by Mario Draghi, increased its stimulus efforts in November by unexpectedly cutting its main interest rate to a record low. Policymakers at the ECB decided to lower the interest rate at which it lends to banks from 0.50 percent to 0.25 percent. Earlier this year, Draghi pledged to do “whatever it takes to preserve the euro. And believe me, it will be enough.”
Over the past five years, the global stock of dollars, yen, and euros has surged by 21 percent, easily outpacing nominal GDP growth in their respective countries, according to JPMorgan Chase. Even more dramatic, the growth in the monetary base of those three currencies has skyrocketed 150 percent in the same period.
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