The U.S. economic recovery appears to have finally moved onto a faster track, but will the rest of the world follow? Global politics may play a large role in answering that question.
As the U.S. economy struggled to gain steam in recent years, it faced head winds from Europe’s deep debt crisis, a stagnant Japan, investor aversion to emerging economies, and a slowdown in China that would pass for a blistering pace anywhere else.
Those global trends didn’t hold back the United States, and in some cases they were brought about by events in the U.S. economy. But they did contribute to slower growth and add to a widespread feeling of uncertainty. The trend is reversing, but five big developing nations have contentious elections this year.
The U.S. economy grew at an annualized rate of 4.1 percent from July to September, and economists are ratcheting up their forecast for the final three months of 2013.
The optimistic outlook for this year builds on the good news that Europe finally seems ready to grow again. Albeit at a sluggish pace, Europe’s growth at least will add to the acceleration of global economic growth rather than detract from it. And Japan, having deployed actions to stimulate growth similar to those the United States took, is expected to be a healthy contributor to global growth.
Think of it as a global synchronization, in which developed and major developing economies start to grow again in lockstep, said Jim Paulsen, the chief investment strategist for Wells Capital Management in Minneapolis-St. Paul, part of global bank Wells Fargo.
This synchronization implies that global demand increases for agriculture, forestry and mined products. That’s good for U.S. farmers, miners and loggers, as growing demand has the added benefit of boosting not only exports but also prices.
Yet that’s not what Paulsen sees as the main benefit. He thinks all that cash that companies have been sitting on may finally be freed up, because CEOs will feel better now about the global outlook.
“I just think people have scratched their heads for a long time … but they haven’t stepped up,” Paulsen said. “At least in every major market that you operate in global trade, you’re seeing things head in the right direction.”
It’s easy to forget how unusual a period the past eight years represent: the worst downturn in the United States since the Great Depression, and Europe in a mess not seen since the aftermath of World War II. Japan has struggled for a decade to get back on firmer footing, and the only good-news story was emerging economies such as China and Brazil.
But the Federal Reserve’s unconventional support for the U.S. economy led to an exodus of investors from Brazil and other emerging markets. The Fed’s bond-buying program in the past year helped spark huge returns in U.S. stocks, offering outsized gains with much less risk than investing in developing nations.
The Fed said in December that it would begin tapering back those bond purchases this month and continue throughout 2014. That means emerging nations such as Brazil, India and Turkey will be able to attract more investors and presumably grow at a faster pace, boosting demand for U.S. farm products and manufactured goods.
The largest emerging market, China, had its leadership transition in 2013. The Communist Party installed Xi Jinping as the nation’s leader last year, and he’s already putting his personal touch on the job. He has taken a more informal tack at public events, even surprising locals in Beijing recently by dropping by a common-man restaurant for what news reports said were steamed buns and pig intestines.
China’s double-digit rate of economic growth has slowed in recent years, thinning the export pie for farmers and miners from the United States, Brazil, Australia and elsewhere. And the reforms Xi plans to pursue may pay off only over a longer horizon.
“Cutting back on subsidies, scaling back excessive investment, raising the cost of funding and putting public financing on a sounder footing may retard growth initially,” Frederic Neumann, a co-head of Asian economics research for global bank HSBC, warned in an investment note. “2014, in short, may be the year when difficult decisions are finally taken, but don’t expect growth to surge ahead just yet.”
Xi faces the tough task of maintaining an interventionist approach in order to keep creating jobs for the millions who are abandoning the countryside in search of factory work while allowing market forces to increasingly dictate decision making in the Chinese economy.
“We are moderately optimistic that the Chinese leadership can put in place some reforms that can keep growth growing, but they’re doing a balancing act,” said Nariman Behravesh, the chief economist for IHS Global Insight.
Xi hopes to keep the Chinese state as the driver of relations with the marketplace while allowing the market a more decisive role in the allocation of resources in the economy.
“There you’ve got speaking out of both sides of their mouth,” Behravesh said, adding, “They’ve got a lot of vested interests. They don’t want to upset the apple cart.”