IHS Top 10 Economic Predictions for 2014

IHS Top 10 Economic Predictions for 2014

Nariman Behravesh
Chief Economist
IHS
December 2013

About
Nariman Behravesh, IHS Chief Economist
Dr. Nariman Behravesh is Chief Economist of IHS and author of SpinFree Economics: A No-Nonsense, Nonpartisan Guide to Today's
Global Economic Debates (McGraw-Hill). Directing IHS' entire
economic forecasting process, he is responsible for developing the
economic outlook and risk analysis for the United States, Europe,
Japan, China and other emerging markets. He oversees the work of
over 400 professionals, located in North America, Europe, Asia, Latin
America, the Middle East and Africa who cover economic, financial, and political
developments in over 200 countries.
Behravesh and his team have ranked among the top economic forecasters over the
years in surveys by Reuters, USA Today, MarketWatch and The Wall Street Journal.
Behravesh holds Ph.D. and M.A. degrees in economics from the University of
Pennsylvania, and a B.Sc. from the Massachusetts Institute of Technology. He
is fluent in several languages and travels regularly to Europe, Asia, Africa, and
Latin America.
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IHS Top 10 Economic Predictions for 2014 I Copyright © 2013 IHS

Overview:
World growth will accelerate gradually in 2014
 The global growth rebound will be quite modest at 3.3% growth
in 2014, compared with 2.5% in 2013
 The easing of private sector de-leveraging and public sector
austerity will help the world economy, especially in developed
economies, emerge from its extended two-year “soft patch”
 Emerging economies will enjoy stronger growth numbers due to
export-led growth to the United States, Europe, and China
 Upside surprises about growth will likely more than balance out
downside surprises – as long as the more daunting risks facing
the world economy (e.g. an oil shock) don’t materialize

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Prediction 1: US growth will slowly speed up
 There will be less drag on the economy due to fiscal policy,
allowing the underlying strengths of the economy to become
more visible
 Economic drivers of growth in 2014 will include:
 Housing (despite the recent run-up in mortgage rates)
 Ripple effects of the unconventional oil and gas boom
 Capital spending increases (although more subdued relative
to other cyclical recoveries)
 Consumer spending to support US growth (should come in
around 2.5% in 2014 after a meager 1.7% in 2013)
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Prediction 2: The European recovery will proceed,
but at a very sluggish pace
 The Eurozone recovery will have staying power and support
growth of 0.8% in 2014, utilizing:
 Very accommodative monetary policy
 Stabilized labor markets
 Less emphasis on austerity by EU officials
 Improved spending power because of ultra-low inflation
 Better competitiveness in the peripheral countries
 More confidence in the ability of Eurozone politicians to
manage the sovereign debt crisis.
 Some countries (e.g. Greece, Italy and Spain) will struggle to
achieve positive growth
 Both Germany and the United Kingdom will grow faster in 2014
than they did in 2013
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Prediction 3:
China’s growth rate will be sustained
 After hitting a low point in early 2013, China’s recovery
reaccelerated thanks to the government’s “mini-stimulus.”
 IHS expects the pace of Chinese growth to quicken a little from
7.8% in 2013 to 8.0% in 2014.
 Further moderate stimulus will be applied if growth falls below
7.5%. Much stronger stimulus will be forthcoming if growth falls
below 7.0%.
 The bigger growth challenge for China will be over the medium
term, as it deals with the daunting problems of an aging and the
consequences of rapid credit growth, including a new housing
bubble and rising debt levels
 A bigger uncertainty facing the global economy in the coming
decade is whether China can avoid the “middle-income trap”
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Prediction 4:
Other emerging markets will perform a little better
 The global environment facing emerging markets will be more
growth friendly than it has been in the last three years
 US and Chinese growth will be a little stronger and the
Eurozone will no longer be a drag on the world economy
 Emerging markets exports will again become a source of growth
 Real GDP growth for these economies will strengthen from 4.7% in
2013 to 5.4% in 2014. There is an expectation that the 2014
“tapering” of US monetary policy will have a relatively minor impact
 A return to the very rapid growth rates enjoyed in boom years of
the 2000s is unlikely unless governments in these countries enact
more structural reforms to raise productivity, allocate capital more
efficiently, and thereby boost potential growth
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Prediction 5: Unemployment rates
in the developed world will remain high
 The unemployment rate in the advanced economies will only
decline from 8.1% in 2013 to only 7.9% in 2014
 Technology-driven productivity improvements in both the
manufacturing and services sectors will continue to erode the
demand for labor
 Firms’ aggressive cost-cutting efforts will continue largely
unabated in 2014, heightening pressures on many governments
to implement corrective pro-employment policies
 US unemployment rate is expected to decline from 7.4% in 2013
to 6.6% in 2014, as much from weakness in labor-force growth
as from genuine employment growth
 Eurozone unemployment will remain near its record highs
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Prediction 6: Commodity prices will go nowhere
and inflation will remain a low-level threat
 Gradual strengthening demand for most commodities will be
balanced out by either higher production or ample inventories
 Commodity prices in 2014 will be essentially the same as in
2013—they will go nowhere
 Tame commodity markets, along with excess capacity in labor and
product markets, will keep 2014 CPI inflation below 2% for the
advanced economies
 A growing risk is that inflation could continue to fall, as it has
since 2011
 Price pressures will also ease in the emerging world
 Emerging markets inflation, the result of the “taper panic” in
emerging markets (May to August 2013), which pushed down
exchange rates and pushed up imported inflation, will reverse
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Prediction 7: The Fed will start scaling back its stimulus,
while other central banks will likely wait or provide more
 The Fed is expected to begin scaling back its bond purchases no
later than January 2014, while leaving interest rates unchanged
until early 2015
 IHS expects the Bank of England to wait until the second half of
2015 to raise interest rates.
 On the other hand, given continued weakness in Eurozone
growth, the European Central Bank may feel compelled to do its
bit by engaging in another round of Long-Term Refinancing
Operations (LTROs)
 In late 2013, some emerging-market central banks began raising
rates; but as inflationary pressures ease, they will likely put policy
on hold or (in a few cases) ease
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Prediction 8:
Fiscal headwinds will ease
 With the US federal spending sequester now replaced by a fiscal
compromise worked out between the Democrats and Republicans,
the drag from US fiscal policy will ease considerably in 2014
 One manifestation of this will be an unchanged federal budget deficit
(at just under $700 billion) from 2013 to 2014—following a sharp
decline from around $1.3 trillion in 2011
 Similar easing of fiscal pressures will be evident in Europe
 After having been slashed during the past three years, the budget
deficits in many of Western Europe’s economies will fall more
gradually over the coming year, as they near more-sustainable levels
relative to GDP
 Many of the “crisis economies” of the Eurozone will be given a little
more time to meet their fiscal targets
11


Prediction 9:
The US dollar will strengthen against most currencies
 Two important trends will push the dollar up against most of the
world’s key currencies
 US growth will be strengthening and growth differentials with other
advanced economies will be sizeable
 Second (and possibly more important) is the near certainty that the Fed will
be removing stimulus sooner than most other major central banks. This will
weigh down on the euro and the yen and also push down the currencies of
emerging markets—especially those that have precarious balance-ofpayment conditions

 Given that financial markets already anticipate the Fed tapering,
the impact of the actual tapering, when it happens, could be
smaller than what happened in the summer of 2013
 The Chinese renminbi is the only major currency that is likely to
appreciate against the dollar in 2014
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Prediction 10: There will be more upside risks
than downside risks facing the global economy
 In recent years, the US, Eurozone, and Japanese central banks
have exhibited a proactive approach to managing crises (despite
facing vocal domestic debates), and have thereby removed some
of the impediments to future economic growth
 This has contributed to a shift in the balance of risks from negative
to neutral
 Over the next year, we are likely to be more surprised on the upside
than the downside, but there is no shortage of downside risks:
instability in the Middle East and North Africa, more fiscal drag,
more disappointing news from emerging markets, etc…
 We could see stronger-than-anticipated growth in the United States,
the United Kingdom, and Germany
 Emerging markets such as China, India and Brazil could also do
better than predicted
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Learn more

Learn more about our economic
predictions and get additional insights
on the global economic outlook and risks.
ihs.com/predictions
About IHS
IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape
today’s business landscape. Businesses and governments in more than 165 countries around the globe
rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to
make high-impact decisions and develop strategies with speed and confidence. IHS has been in
business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005.
Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and
employs approximately 8,000 people in 31 countries around the world.
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IHS Top 10 Economic Predictions for 2014

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