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By HaleStewart December 19, 2013 8:16 am
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What Will Be the Big International Economic Stories of 2014?

In my previous year-end column, I looked at the big economic stories for 2013.  Today, I want to take a look into 2014 to see what might be in store economically.  So, here are what could be the big economic developments coming down the pike in 2014.

Will the EU return to growth?  Starting with the Greek crisis, continuing with the Cyprus default and following through over the negative GDP growth between mid-2012 and 2013, the EU has had a terrible three years.  It looked like they might be pulling out of their slump a few quarters ago, but recent data show the economy again slowing to near 0% growth, but this time with the potential of deflation.  The ECB was able to jaw-bone the markets with its promise to do “whatever it takes” to keep the union together, but that promise is clearly losing steam, forcing the bank to cut rates an additional 25 basis points recently.  The central problem is that while some countries continue to do well (Germany) others are still limping along.  It’s going to take a lot of policy work to turn the union around.

Will the US economy start growing above 3%?  Forgotten by many economists is the fact the US’ last recession was caused by a bubble bursting.  That means that on the other side of the recession we have very slow growth as consumers pay down debt and restore their balance sheets.  However, US consumers are now in pretty good financial shape and businesses have plenty of cash to invest.  The housing market is rebounding (although rising interest rates will hurt a bit) and the latest budget deal may have lowered the fiscal gridlock in Washington.  And best of all, employment growth appears to be picking up.  However, we’ve gotten plenty of false positives from the economy before, so before we declare that we’ve returned to a period of “self-sustaining” growth, we should wait for the numbers to back up the assertion.

Will China actually rebalance?  The Chinese juggernaut has been built on infrastructure investment, cheap labor and a strong manufacturing sector fueling massive exports thanks to a manipulated currency.  However, Chinese labor costs are no longer competitive, forcing the government's hand to try and “rebalance” their economy to one based more on personal consumption.  The jury is still out on this potential development.  In addition, China has some other, very serious issues that may hurt growth in the long run, led by pollution shortening life spans and increasing health care costs.

Will Abenomics success continue?  Abenomics is based on three separate “legs” – a monetary loosening, fiscal stimulus and structural reform to kick Japan out of its "lost decade."  The BOJ has been very successful in lowering the yen’s value.  There has been some fiscal stimulus, but structural reform has been a bit harder to achieve (as would be expected).   The jury is still out on this plan’s long-term efficacy, although recent increases in Japanese inflation are encouraging.

Will the BICs right their economic ship?  While China will probably continue growing, Brazil, India and Russia are all suffering from slower growth and in two cases (Brazil and India) higher inflation.  Unfortunately, there is no quick fix for any of them.  India has a huge problem with governmental red tape and a tax situation that is a true hindrance to foreign investment.  Russia is plagued by chronic mis-management and Brazil has a large under-investment problem.  None of these problems are easy to fix.  The real question for all three countries next year is will they begin to deal with their central problems?

What’s the next global growth story? For the last 10-15 years, the central, underlying growth model for most of the world was the “south-south” trade, where China consumes massive quantities of raw materials which it purchases from smaller, resource rich countries located in the southern hemisphere.  As China loses its position as the world’s primary maker of all things manufactured, will another central growth story emerge, or, instead, will be see a fragmented picture?  The most likely answer is the latter, as there are no countries which have the capability to be the central production zone for a mass of imported materials.

That’s it for the potentially big stories for 2014.  There are others, of course, but I think the above four will be the big ones for the year.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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