This commentary seeks to provide guidance over a 3 -5 year timescale.
Taking the three big economies of the Eurozone in turn:
The German economy is moving forward quite well, with low inflation and some reasonable growth figures, but is ever more reliant upon non-Eurozone exports. Growth over the last couple of decades has been partly due to the removal of the premium exchange rate attached to the Deutschemark when selling into the Eurozone. There is no growth and little activity in the Eurozone, so Germany has to look elsewhere – most notably east.
Eastern Europe, Germany’s major recent growth opportunity, is still suffering from the disturbances in the Ukraine, and there are some signs of a slowdown in the most recent quarter’s data. Growth rates for the rest of the year really do depend upon stabilisation of the Ukrainian situation, but are unlikely to top 1.5%. The future is pretty murky, with the Eurozone still in trouble and concerned about deflation it is very difficult to see real growth over the next 3 years.
France is in a poor way. Recent elections have shown just how isolated Hollande is, and the growth rates are minimal. The most recent forecasts I have seen suggest growth of below 1% for 2014, and I cannot see a significant recovery in the next three years.
Italy is also in trouble. The new broom has arrived, but significant political and economic reform is required for real growth. The economy will flat-line at best for 2014 and it is difficult to see where growth will come from. The instability and floods of refugees from North Africa are adding to the pressure. Growth will be minimal, if any.
Overall, there will be little growth in Europe. Political instability in North Africa and Eastern Europe will continue to be a distraction and drain on resources, but at least the worst of the Euro crisis seems to be over. It’s a stable economic environment now, one of the keys to attracting inward investment, and still a large chunk of the world’s economy.
The main story in the UK is centred on house prices and the fear of an asset price bubble, especially if it is driven by excessive debt. Expect to see significant controls on mortgage lending in the next few months.
Aside from house prices, the economy appears to be showing strength in most sectors. There a process of rebalancing the UK away from the financial services sector (which is considerably smaller than in the peak of 2008-9) which requires that other sectors take up the slack.
The services sector remains by far the largest part of our economy, but manufacturing is showing signs of growth. Growth of 3.5% for 2014, with a fall of to 3% in 2015-6.
UK Base rates of 0.5% will not be with us in a year’s time, and may be increased as early as Q4 2014 but increases will be “gradual and limited” as the BofE are telling us. There are an lot of “Zombie” companies and households, who have barely survived the recession and would be killed off by any sudden and large increases in interest rates.
Political turmoil continues with the republican party splintering yet again, following the recent election of a tea party candidate to replace the House Majority leader, Eric Cantor. It seems unlikely that the republicans will mount a sensible challenge to Hillary Clinton at the next election in 2016. In the business world, the lack of political meddling is good news. The shale gas story is driving the US economy, with business “re-shoring” manufacturing on the back of cheaper energy. Unlike Europe, the US demographic profile is favourable with a younger, educated, upwardly mobile population, many of whom are of Latino origin. Growth rates of 3% in 2014 and possibly 3.5% from 2015-2016.
The Wold Cup and the Olympics may give a temporary boost to the economy, but it will be minor.
This is very much a story of unfulfilled potential, but until the infrastructure is in place and the social divides are narrowed it seems very likely to remain unfulfilled. Growth rates seem likely to be in the 2-3% range.
Putin’s antics in the Ukraine have resulted in economic sanctions and made a recession in 2014 very likely. The last few years have seen Russia trading its vast supplies of oil and particularly gas for political and economic advantage, but European political leaders do not want to be beholden to Putin and will reduce their purchases whenever possible. It’s difficult to see an economic upside over the next 3 or more years.
Narendra Modi of the BJP party has been elected on a platform of economic reform, and has approved a numbers of defence related infrastructure projects. That’s a decent start but many problems remain in the civilian world.
Growth rates of 4-6% in the forecast period.
The big question over China remains the size of the shadow banking sector. Unregulated or lightly regulated lending has the potential to create instability in the mainstream financial services sector, with consequences that we in the western economies know only too well.
It’s my view that the Chinese authorities will manage the reduction in the shadow sector, and although there will be some casualties they will be relatively minor.
Overall, very positive with growth in the 7-9% ranges.
I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it.
The big risk country is Thailand, following the army coup, but there is a history of the army taking power for a few years and then reverting to democracy. In the past, the king has proven to be a stabilising influence but on this occasion he has been very quiet – perhaps through old age and / or ill health.
Myanmar, the former Burma seems more stable in this quarter than last, but it remains only a few months ago that it was a state ruled by the army.
The political risk in this area is conflict with North Korea, which would heavily affect South Korea.
Growth rates could be exceptional at up to 10 – 12%
Some territorial disputes in the South China Sea have raised their heads again. China, Japan and Vietnam all lay claim to some islands, but of course it is the natural resources surrounding ( and beneath) the islands that is of interest. That’s most likely just a side show.
Sclerotic corporate structures continue to inhibit growth. The worlds’ 3rd largest economy will continue to grow slowly.
The main stories in this region remain political turmoil and civil insurrection in Syria, Iraq and Egypt.
The Gulf States have significant natural resources, but Middle East oil & gas is becoming less important to the world economy as Shale Gas, improved efficiency and new discoveries reduce the world’s reliance on the region.
It is difficult to be optimistic for prospects in this region.
The Aussies had a good run up until the end of 2012, but I think they have more reasons to be optimistic about the cricket than about their economy for the next few years.
© Tim Luscombe June 2014