Opinion / Op-Ed Contributors

Rising East, emerging West

By Marios Maratheftis (China Daily) Updated: 2013-12-24 07:16

Expect a better 2014. World economic growth should pick up and inflation should stay benign. But the way growth plays out will depend largely on policy changes in the US and China, the world's two largest economies. Will incoming US Federal Reserve Chair Janet Yellen be able to finish unwinding the Fed's five-year-old quantitative easing (QE) program without hurting the fragile recovery? Can Premier Li Keqiang execute the boldest set of economic reforms in three decades to turn China into a more sustainable, consumer-driven economy? We think the answer is "Yes" to both questions.

All signs point to a stronger year for the world economy, with global growth expected to accelerate to 3.3 percent from this year's 2.7 percent thanks to improvements in the US and Europe. Nothing signals this better than outgoing Fed Chairman Ben Bernanke's decision to start unwinding QE in the US - this pronouncement is a vote for the growing strength of the US economy and shows how far the economy has progressed since the dark days of 2008-09. A recovering West is excellent news for world trade and for the continued outperformance of emerging markets.

The expected ending of QE by the close of 2014 would be a significant event, even if QE was never the answer to all the challenges facing the developed world, particularly the US. With policy rates hovering close to 0 percent, QE was unlikely to raise growth and encourage job creation. And it did not. It did, however, play an important role.

QE helped the Fed manage interest rate expectations. A central bank that is implementing QE is highly unlikely to hike interest rates anytime soon. As a result, long-term market interest rates remained low, and this helped some parts of the economy, particularly the housing market, to recover.

Yellen's most important action once she takes charge of the Fed should be to orchestrate a smooth unwinding of QE without causing a sharp rise in long-term interest rates. Yellen and the other Fed policy makers will need to see strong evidence that the economy is about to accelerate as it proceeds with tapering. We expect the US economy to show enough resilience for the Fed to complete tapering by the end of 2014.

With QE coming to a close, the Fed is likely to rely mostly on forward guidance to influence market rates, which may not be as effective. As a result, expect market interest rates to move higher in 2014. Inflation still remains benign, with the exception of a few emerging markets; commodity prices are stable; and labor markets, both in the US and Europe, remain substantially slack. Meanwhile, the Fed is likely to raise its benchmark policy rate only at the end of 2015.

Where does this leave Asia and the other emerging markets? The acceleration in US activity and Europe's return to growth after two years of contraction are pleasant changes for Asia, which for the past five years has been relying mostly on domestic demand and trade with other emerging markets to power the global recovery.

China should be particularly pleased with the upturn in the West as it tries to usher in the most ambitious package of reforms since it opened up to the world in the 1980s. In fact, reform and rebalancing will be in focus across Asia in the coming year. Premier Li has been tasked with overseeing China's economic rebalancing, with consumption growing in importance relative to investment. This is moving along nicely, and the recently concluded Third Plenary Session provided the clearest sign that President Xi Jinping and his colleagues in the Politburo of the Communist Party of China are leading the ambitious agenda for economic and social reform.

Starting next year, expect a stronger push for land and State-owned enterprise reform, a further opening of the capital account, and less intervention in the currency markets. These reforms are necessary for the sustainability of China's growth, but short-term volatility cannot be ruled out.

Meanwhile, economies in Southeast Asia are likely to benefit from their growing competitiveness with China as a manufacturing center, enabling them to attract increased foreign direct investment. Urbanization, a strong driver of growth in the region, has a long way to go with the build-up of infrastructure and increased industrial activity.

As in Asia, the resource-rich Gulf Cooperation Council (GCC) countries in the Middle East can look forward to a strong year ahead. Oil prices are likely to remain above levels that would boost the coffers of GCC governments, enabling them to use their fiscal strength to drive near-term growth and diversify their economies away from energy industries. However, oil importers in the Middle East and North Africa face slower economic activity, rising fiscal pressures and increasing youth unemployment. Thus, the Middle East remains a tale of two worlds.

Meanwhile, Africa is likely to outperform world growth in 2014, as it has for the past decade. Resource exploration remains important and commodity output gains should compensate for weaker prices in terms of the impact on growth. However, domestic demand remains the fundamental driver of growth across the continent. The rise of the African consumer - spurred by an improved policy environment, stable inflation, greater savings and a more open embrace of the private sector - is being reinforced by large-scale infrastructure and resource investment, as seen most recently in eastern Africa, where governments are keen to commercialize new oil and gas discoveries.

All in all, 2014 should be a better year than 2013. The global economic recovery, so far shouldered by the emerging economies, is likely to broaden with the West joining in. However, the growth gap between G7 and the emerging markets is unlikely to close anytime soon. Challenges lurk as the Fed forays into unchartered territory yet again, this time trying to undo its QE program. Meanwhile, China is about to enter its most decisive phase of reform as it strives to become a consumer-driven, middle-income economy.

The author is global head of macro research at Standard Chartered Bank.

(China Daily 12/24/2013 page9)

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