There is a danger that opinions over the strengthening in advanced economies and the weakening in emerging markets could be overblown. In my view, notwithstanding the current slowdown, emerging markets still hold impressive long-term growth potential whilst advanced economies, although strengthening, have important challenges they have yet to overcome in order to turn recent gains into sustained long-term growth.
Real GDP Growth in the 10 Largest Advanced Economies: Q1 2012 – Q2 2013
Source: Euromonitor International from national statistics/Eurostat/OECD
Right direction but hurdles to overcome
Advanced economies are on the whole on the road to recovery and this has been seen in recent releases from many national statistics offices. Whilst the good news is welcome, and growth is heading in the right direction, many underlying problems have not been addressed. The fear is that as growth strengthens and memories of 2008 and 2009 fade the pressure for reform will be reduced.
Stagnant incomes in the UK
Growth has picked up more than expected in the UK, but the government’s “Help to Buy” scheme which sees the government guaranteeing 15% of housing loans for those with a 5% deposit risks another housing bubble. Added to this, household debt, although lower than pre-recession levels, is still high; disposable incomes are stagnant and will only reach pre-recession levels in 2016. In this scenario it’s hard to see where private consumption growth will come from – particularly when interest rates rise as this will squeeze household budgets further.
High unemployment to linger in the eurozone
The eurozone is beginning to see a modest recovery, with economic growth of 0.6% likely in 2014. However, as ever this growth masks divisions with the periphery countries still struggling – Spain, Slovenia, Greece and Cyprus are all expected to see their economies shrink once more in 2014. Unemployment is a huge concern and will not return to pre-crisis levels until beyond 2020, banks remain undercapitalised and the sovereign debt crisis, although in a quiet phase, still has the risk of reigniting.
Japan must keep reform momentum going
The Japanese economy is also heading in the right direction, inflation has picked up to reach its highest annual rate (0.9%) in five years in August 2013, but this has been helped by the weak yen at least as much as it has been by Abenomics. With public debt above 240% of GDP and the world’s oldest population, further reforms are clearly needed. Abe needs to keep the momentum for change going for the recovery to be sustained.
USA playing with fire
US growth has been broad-based and looks set to accelerate in the coming quarters – although the sequester is going to continue to act as a break on growth in 2014. Unemployment has fallen (to 7.3% in August 2013), but in part this is due to a decline in the economically active population, rather than a surge in hiring. In addition, with the US shutdown and impending debt ceiling negotiations the US risks staggering towards an abyss. In all likelihood the shutdown will be resolved and a default avoided, but the fact that a US default is even a possibility is almost inconceivable and the consequences for both the US and the global economy were it to occur are hard to quantify. As it stands, political sclerosis in the US is not good for business confidence in the country and damages the USA’s reputation globally.
Structural reforms key to unlocking growth potential
This is not to say that brighter economic news is not promising – it is – but it would be foolish to replace the emerging market bandwagon with a developed economy equivalent. In general terms advanced economies have many strengths over their emerging counterparts – stable and accountable government, lower levels of corruption, educated populations, skilled workforces, better infrastructure and high average incomes being amongst their key advantages. Yet the need for structural reforms in many economies, combined with ageing populations, the lingering debt hangover and high unemployment – especially amongst the young – remain key areas of concern and major drags on growth.