Comment: Global recovery yet to take shape

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While Bank of England governor Mark Carney quotes Dickens, policymakers elsewhere are calling different tunes, write Richard Dunbar and Lucy O’Carroll at Scottish Widows Investment Partnership

“The Ghost of Christmas Present is a cheerful spirit”. So said Bank of England (BoE) governor Mark Carney recently. Indeed, the second spirit to visit Ebenezer Scrooge – described in Charles Dickens’ A Christmas Carol as a “jolly giant” – seems a fitting emblem for the UK economy’s performance in 2013.

Elsewhere, Japan has also staged a marked rebound, but growth in other countries has ranged from slightly below trend in the United States to slowdown in a number of emerging economies.

Overall, our economic forecasts for 2013 tended to be confirmed by subsequent events, providing the platform for good investment performance.

However, as the Ghost of Christmas Present reminds Scrooge, he can only exist until Twelfth Night, disappearing just as the Ghost of Christmas Yet to Come drifts into view “like a mist along the ground”.

This ghost is a more fearsome spirit, hooded and mute, with Scrooge divining his intent through a series of rhetorical questions. We anticipate continued global recovery in 2014, with the pattern of divergent growth trends continuing.

The US and eurozone look to set to end the year 2013 on a weak note but the similarities end there.

For the US, this is mainly a technical correction from a strong third quarter. Congress has struck a deal preventing another government shutdown next year.

The debt ceiling remains an issue for spring 2014, but is not expected to derail a recovery underpinned by improving consumer spending, accelerating business investment and a stronger housing market. Nor is the tapering of asset purchases, which the Federal Reserve has announced will begin in January 2014.

The eurozone’s problems are more enduring, and we expect a weak 0.9 per cent expansion next year.

Growth will continue to be largely accounted for by exports, leaving the recovery vulnerable to any unexpected euro appreciation. We remain above consensus on the prospects for US growth and marginally below consensus on the eurozone.

After several false starts, the UK economy is finally gathering momentum with growth in 2014 expected to reach a seven-year high.

We anticipate UK growth of 2.4 per cent next year, up from 1.4 per cent in 2013.

So far, the recovery has been narrowly focused on the consumer sector and housing market. A recent flattening off of retail sales points to continued pressure on household incomes from weak wage growth, emphasising the need for a broadening out of activity next year to investment and exports.

China is likely to achieve its growth targets next year but other emerging economies face challenges.

We expect China to grow slightly faster than 7 per cent next year, as the authorities attempt to balance credit-cycle management against growth targets. This is likely to be an outperformance relative to Brazil, Russia and India, the other constituents of the so-called Bric economies, which face challenges both from structural impediments to strong, sustained growth and from the potential market impacts of asset-purchase tapering by the Fed.

Divergence in policy settings is also likely to be a theme for 2014 though “low for long” remains the prevailing interest-rate message from the major central banks.

Some emerging economies may tighten monetary policy in the face of inflationary pressures, currency weakness and the Fed’s tapering actions.

In contrast, aggressive monetary expansion will continue in Japan. Doubts over the achievability of the Bank of Japan’s inflation target and the impact of consumption-tax rises could result in additional central bank stimulus.

Similarly, the European Central Bank may cut rates or engage in further exceptional policies if deflation risks appear to be growing during the year.

Though the UK economy’s rebound is welcome, it remains in its early stages and the Bank of England has signalled that 2014 is likely to be a quiet year – with no changes in interest rates or its exceptional policy measures.

* Richard Dunbar is deputy head of global strategy and Lucy O’Carroll is chief economist at Swip.