The global economy is recovering. Yet many people around the world do not feel that things are getting better—nor do they have much confidence that 2014 will bring significant improvements.
To some extent, this perception is correct. Countries are not like boats in a rising tide, and high levels of inequality mean that increasing national averages often provide a misleading picture of the day-to-day realities most families face. In the United States, for example, the recovery is technically over four years old. But while stock markets are booming and those at the top of the income and wealth pyramid are doing very well, the majority of households have seen essentially no improvement in living standards. Although unemployment is declining, it remains high. And the headline numbers conceal an even larger contingent of discouraged workers. Of those that are employed, many continue to fear for their jobs.The gap between the reality of the economic recovery and people’s perceptions of it matters—a great deal, actually—for two reasons. First, consumers and investors will not reach for their wallets until they are confident things are getting better. Second, talk of a global or national recovery that people cannot feel or touch breeds cynicism and disbelief. It encourages opposition, even to sensible policies. And, as is all too evident most nights on television, it provides fuel for extremists of all hues. So it is important to understand what is driving the global recovery and why so many are not participating in it, at least for the time being.
Tidings of Recovery
For most countries, 2014 will be a year of improved economic performance. China, thanks to its dynamism, size, and reliance on international trade, probably exerts the single largest influence on contemporary global economic growth. Nudged along by stimulus policies, it is again advancing at a solid pace (an annualized rate of over 9 percent) and is pulling many countries along with it.
At the recent third plenum of the Chinese Communist Party, policymakers suggested that China may enact major reforms of its rural landholding system, such as giving farmers the right to own their land, and its state-owned enterprises. These reforms would help make China more reliant on market disciplines and also increase domestic demand, which in turn would reinforce China’s capacity to spur growth in its trading partners.
The situation in the United States is not quite as rosy. Most U.S. consumers remain hesitant to spend since real wages are flat or declining, and many Americans are simply not part of the national recovery.
However, there are reasons for optimism. American households have improved their balance sheets, and banks have rebuilt their capital and are lending again. Construction is still depressed relative to its historical trend, but it is recovering quite rapidly. Automobile registrations, supported by aggressive incentive programs, are surging as consumers replace their aging cars. State governments have improved their finances and are spending again, and in 2014 the negative effects of reduced spending by the federal government are expected to abate. The Federal Reserve will likely retain its expansionary stance under Janet Yellen, the nominee to be the next chair. And as growth in the United States returns to levels near the country’s long-term potential GDP growth rate of about 3 percent, neighboring Canada and Mexico will benefit from increased U.S. demand.
Some of the other large, advanced economies are also likely to have a good 2014. Japan—spurred by the economic policies of Prime Minister Shinzo Abe, which include a massive dose of quantitative easing and yen devaluation—may not maintain its recent rapid momentum, but it will still see modest growth helped by a more competitive export sector. The United Kingdom promises to outgrow all its large European neighbors thanks to the benefits of improved competitiveness and an expansionary monetary policy. Moreover, the vigorous efforts of the UK coalition government to tackle the economic crisis appear to be finally paying dividends.
Several emerging markets, especially the Asian economies that are dependent on China and the United States, will likely continue to see high growth rates. They will build on the recovery in their export markets and keep catching up to the advanced countries that are at the leading edge of technology.
There is also good news on the global trade front, as the World Trade Organization has just closed on its first multilateral trade deal since its inception in 1995. The Bali deal, named after the island where the ministerial conference took place in early December, is of limited scope but includes a serious attempt at improving customs practices around the world. When implemented, these reforms could facilitate international trade. Moreover, the successful conclusion of such a complex negotiation increases confidence among global investors and gives hope that the multilateral system—an essential plank of post–World War II global prosperity—will retain its capacity to make trade more open and secure.
Next year may also see the conclusion of important trade deals, although progress on this front is still uncertain. Negotiations will continue on the Trans-Pacific Partnership, a proposed agreement that would deepen and widen the trade relationship among Pacific Rim economies that account for about one-third of global GDP. And 2014 will also see progress on trade negotiations between the United States and Europe regarding the formation of the Transatlantic Trade and Investment Partnership. These talks got off to a stuttering start but should take off in earnest next year.
An Exclusive Recovery
While global economic aggregates will improve in 2014, many countries will lag behind. The usual suspects—countries that are outcasts or have long been beset by domestic rifts or held back by dismal policies, such as Pakistan, Iran, Venezuela, and the Central African Republic—are unlikely to experience significant economic growth. And they are not alone.
The countries of the Arab Spring, including Egypt, Tunisia, and Libya, have entered a long and harsh economic winter. Foreign investment and tourism have collapsed. In Libya, oil production has been severely hampered. And in Syria, torn as it is by ongoing civil war, there is no end in sight to the implosion of the economy.
There are also a few large, developing countries that have become overly exposed to the international credit cycle. These states could be the source of very bad surprises as the U.S. Federal Reserve proceeds to “taper” its quantitative easing program, or reduce the pace at which the central bank supports the economy by printing money to buy bonds. Turkey and Hungary fall into this category, as do Brazil, Indonesia, and India, although they are less likely candidates for a sudden stop in 2014.
In addition, several African and Latin American countries that have been relying on enormous commodity booms are now seeing slower growth because of declining commodity prices. The countries in this long list represent only a small fraction of global economic activity, about 8 percent. But here, too, averages are misleading. Despite their relatively small share of global GDP, these nations are home to a sizable chunk of the world population—over one-third.
In terms of global economic activity and importance in international capital markets, the most significant exception to the global recovery is represented by the troubled countries of the eurozone and the European Union’s satellites to the east. These countries together account for some 10 percent of world GDP. Italy and Spain, where youth unemployment is rampant, form the core of this group, but France has also seen its competitiveness erode. It is struggling with anemic growth and a fiscal deficit, though it retains the confidence of financial markets.
Even if, as expected, growth in the beleaguered nations of the eurozone picks up a bit in 2014, the recovery will be almost imperceptible to their populations and wholly insufficient to make dents in their stubbornly high unemployment rates. European Central Bank President Mario Draghi’s courageous policies are helping keep the boat afloat, but the eurozone faces strong headwinds, including the credit squeeze and collapse of domestic demand in the peripheral countries, Germany’s obsession with exports and fiscal consolidation, and the premature and unhealthy appreciation of the euro.
There is a high likelihood that Europeans will persevere and that the economies of the periphery will be gradually reoriented toward increased exports and smaller government. Eventually, credit will likely return and fuel domestic demand in these peripheral states once again. Already, Ireland appears to be turning the corner, and hesitant growth has returned in Portugal and Spain. It is also likely that the institutions underpinning the euro will be strengthened through mechanisms such as joint supervision and resolution mechanisms for systemically important banks. But all these processes will take years to complete. In the meantime, sustaining the fragile political consensus behind reforms will remain the biggest challenge.
Perceptions vs. Reality
While the broad global trends in 2014 will be toward economic recovery, not everyone will see his or her fortunes improve. And among the large and struggling middle classes in the United States and Europe and the emerging middle classes in countries such as Turkey, India, and Brazil, citizens will judge the recovery based on their own progress.
People will trust what they can see rather than what they are told is happening at a national or global level. Policymakers will only hurt their credibility by making rosy assessments of global economic recovery. Even worse, such assessments will divert attention away from the tough measures needed to bring beleaguered economies back to health and to make growth more inclusive. And until these measures are enacted, the perception of economic stagnation will continue to trump the reality of economic recovery.