Developed economies lead developing economies amid global sub-par growth in 2014

Jan 14, 2014

14 January 2014 {Hong Kong) - The prospects for global economic growth and stock market performance in 2014 are likely to depend critically on two factors - the success of the US Federal Reserve's (Fed) tapering and communication operations, and the ability of the Eurozone economies to lift their growth rates from merely bumping along the bottom to a meaningful recovery that also reduces the risks of deflation.

Prospects for developed economies for 2014 are much brighter than a year ago, but the budget deficit are only closing very slowly, suggesting the need for extended restraints in government spending. While some developing economies (e.g. Indonesia and India) had allowed money and credit growth which resulted in their subsequent current account deficits, other emerging economies that maintained the discipline (e.g. Taiwan, Korea and Hong Kong through macro-prudential controls) are likely to have a better outlook. Within the emerging markets, reform and election dynamics are the key themes in Asia, with selectivity as the key to performance. Meanwhile, North Asian markets are more likely to benefit from the modest recovery in the developed world.

From a global perspective, Invesco Chief Economist, Dr. John Greenwood said "It is the first time we see a role reversal of developed and developing economies after the global financial crisis Going into the crisis and in the immediate aftermath, developing economies experienced current account surplus and their balance sheets were in good shape. But now, developing economies are experiencing inflation and current account deficits, while the developed economies are repairing their balance sheets and having sub-par gross domestic product (GDP) and earnings growth."

Invesco expects another year of modest real GDP growth in the US, the UK and the Eurozone in 2014. They are 2.5%, 2.6% and OS% respectively. Meanwhile in China, real GDP growth is forecast to be around 7.6% in 2014.

Dr. Greenwood said "In the US, I expect the Fed under Janet Yellen to continue tapering its asset purchases during 2014, but at a slow rate that should see the end of the asset purchases around mid-2015. While currently stronger US labour market data and better GDP figures suggest a more rapid pace of tapering, credit growth remains very weak implying the Fed should delay tapering until the banks are ready to take over the baton of credit creation from the Fed. The other problem for the Fed is that consumer price inflation, which depends ultimately on broad money and credit growth, not on the size of the Fed's balance sheet, is well below the Fed's 2% target. My forecast is that inflation will remain very benign at around 1.5%."

"As for the Friro7one. the nrnsperts for GOP nrnwth are modest at hest. Two hrioht snots  lane the gradual easing of fiscal austerity and the enhanced competitive position of some of  the peripheral economies. However, I think that neither or these improvements otters the promise of a sustainable upturn without either adequate growth of moneyand credit, or a significant weakening of the euro," Dr. Greenwood said.

"It is highly unlikely that economic activity in the Euro-area will revive in the steady-but-sustainable pattern seen in the US. Moreover, with fiscal policy still tight and currency depreciation ruled out, all the three major instruments for reviving an economy -monetary, fiscal and currency - have essentially been left on the shelf. Consequently I forecast a growth rate in 2014 of only 0.8% and an inflation rate of 0.6% - about half the 1.1% rate forecast by the European Central Bank (ECB)," Dr. Greenwood added.

Dr. Greenwood said that the UK economy accelerated steadily through 2013, and consensus forecasts for 2014 are now much stronger than a year ago. "Two key factors prompting the turnaround are the vigorous QE policy conducted by the Bank of England in 2011-12, and the monetary expansion supplemented by two schemes, namely "Furring for Lending" and "Help to Buy". The former scheme enabled the banks to obtain cheaper funds by doing repos in gilts with the Bank of England, while the latter enables first-time home buyers and movers to purchase a property with a 5% deposit, a 20% equity loan from the government, and a 75% mortgage from a bank," Dr. Greenwood added.

While developed economies are recovering at a decent pace, certain Asian markets are also offering attractive opportunities. Invesco Chief Investment Officer (Asia ex. Japan) Paul Chan said: "In Asia, reform and election dynamics are the key themes in 2014; they will chart the structural growth trajectory of Asian countries for yeas to come. Looking forward, we are positive on the outlook of Asia but selectivity is the key to performance, as divergence among economies and stocks is growing."

Within Asia, China is expected to remainas the growth engine "The recent reform package decided at the Third Plenum offers a structural boost to China's growth trajectory," Mr. Chan said, adding that the reform package helps set China's structural rebalancing from an investment or manufacturing-driven model to a more consumer-driven one.

Other than the reforms in China, national elections in India, Indonesia and Thailand are also the highlights in 2014, affecting 1.56 billion people in Asia, as these three economies contribute to almost 20% of the Asia Pacific ex Japan's nominal GDP in 20121, and their Sections could have significant economic implications over the medium term. Having said that, Mr. Chan believes that Asia is still full of opportunities, but investors need to be selective. He sees opportunities in North Asian markets, such as China, Korea and Taiwan, as they aregeared towards the economic recovery of developed markets on the back of a tigher export share to the Western part of the world, where balance sheet recessions are healing, and modest recoveries are under way.

Rtacoveries are generally stronger in those economies where private sector balance sheets have been repaired most, such as in the US. One favourable byproduct is an extended business cycle expansion with low interest rates and low inflation. On the other hand, developing economies with excess credit growth have seen excess spending, deteriorating current account balancesand increased inflation. For these economies, it will take a year or two to restore stable, sustainable growth with low inflation.

And within Asia, selectivity is the key to success. Looking forward, quaky companies in developed world and selected Asian markets with solid earnings growth and dividend distribution should continue to attract investors in 2014.

1 Source: CEIC, Datastream, Bloomberg, MSCI, World Bank, UNESCO, CIA, US Bureau of Statistics, IMF, JP Morgan estimates.

                                                                         - End -