Economists see growth taking off next year

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Washington / London - The world economy is primed for its fastest growth in four years, with the US driving the improvement in output.

Global growth will accelerate to at least 3.4 percent next year from less than 3 percent this year as the euro zone recovers from recession and China and other emerging markets stabilise, according to economists at Goldman Sachs, Deutsche Bank and Morgan Stanley. The UK will be a standout, while Japan risks damping the mood by suffering a mid-year slowdown after an April increase in sales taxes.

“So far it’s been a very bumpy, below-par and brittle expansion,” said Joachim Fels, the co-chief global economist at Morgan Stanley in London. “Next year could bring a very important transition: a transition to a sounder, safer and more sustainable recovery.”

The upturn should prove bullish for equities and bearish for bonds. If it boosts corporate confidence in the durability of growth, it could further fuel demand, raising the odds that next year will break the pattern of recent years and come in better, rather than worse, than projected.

“An improving global growth picture is widely forecast but, in our view, also still doubted in the investor community,” said Dominic Wilson, the chief markets economist at Goldman Sachs.

Wilson’s team is telling clients to bet on a gain in the Standard & Poor’s 500 index to 1900 by the end of next year, from 1782.22 at 4pm on Wednesday in New York. The team also predicts the yield on 10-year treasuries will rise to 3.25 percent from 2.85 percent at 5pm on Wednesday, according to Bloomberg Bond Traderdata.

Key to the improved outlook is the ability of the Federal Reserve and other major central banks to nurture the recovery with easy money while persuading investors not to drive borrowing costs higher prematurely. Fed chairman Ben Bernanke roiled markets worldwide when he hinted in May that the Fed might taper its $85 billion (R880bn) in monthly asset purchases this year.

“None of the central banks would actively resist more economic growth,” Credit Suisse chief economist Neal Soss said.

While Fed officials are seeking to moderate quantitative easing and the Bank of England is ending incentives for mortgage lending, the Bank of Japan and European Central Bank could intensify stimulus.

Meanwhile, Morgan Stanley predicts interest rates will rise in 13 emerging markets, including Brazil and India.

Peter Hooper, a co-head of Deutsche Bank’s global economics team in New York, said the US economy would gain momentum next year after being held back this year by a payroll tax increase and cuts in federal government spending.

A continued recovery in the housing market, coupled with stepped-up spending by consumers, would lift growth to more than 3 percent next year from less than 2 percent this year, he forecast.

US households saw their purchasing power boosted in September by the biggest year-on-year jump in home prices since February 2006, as well as by the rising stock market and continued job growth.

The return to more sustainable growth in the US means investors are increasingly focusing on what data say about the economy than what the numbers mean for the Fed, according to HSBC strategists.

Policymakers want to avoid a repetition of what happened earlier this year, when just the suggestion that the Fed would reduce monthly asset purchases sent long-term interest rates up by 1.37 percentage points. Since then, policymakers have tried to hammer home a double-barrelled message: tapering of stimulus is not a tightening of policy or a signal the central bank is anywhere near ready to raise short-term rates.

European Central Bank president Mario Draghi will probably continue to stress his low-rate guidance as he tries to avoid EU borrowing costs being dragged higher by the US.

Next year may be the first in three when the euro zone expands – albeit at about a third the pace of the US.

Decision Economics chief executive Allen Sinai expects a more positive “sweet spot” for the world economy as it enjoys faster growth without much in the way of higher inflation. That will allow major central banks to keep short-term rates low, fuelling the expansion.

“The odds are that we get an upside surprise to growth next year,” he said. – Bloomberg


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