Big things are in store for the global economy – and interest rates – in 2014, according to economists. The World Bank released their semi-annual Global Economic Prospects report Tuesday, announcing a more optimistic stance as the U.S. gets back on track and Europe continues cautious recovery.
The U.S.-based poverty initiative and think tank predicts global GDP will improve by 3.2 per cent this year, up from 2.4 per cent in 2013. U.S. growth forecasts are especially cheery, at 2.8 per cent this year – an improvement that will be felt around the world.
Economic Check In
The report breaks down the climate in main economies and their risk factors. Here are the top developments to watch this year:
Europe: There’s been a lot of improvement in the Eurozone as banks continue to restructure, and recovery methods rely less on severe austerity measures. However, unemployment remains a rampant problem, and it’s unclear what exactly will drive the economy in the years to come. As well, plans to establish a European banking union are still in the works. Overall, the region is still very vulnerable to big shocks.
U.S.: Good news here – the nation’s deficit has shrunk, mainly due to the steep spending cuts brought on by the sequester – but a long term plan to tackle the debt to GDP ratio is still lacking. While better conditions have led the Federal Reserve to reduce their stimulus measures, aka the “taper” (think of it as slowly removing their economic safety net), they need to tread very carefully – tapering too aggressively could lead to a negative market reaction, and resulting higher interest rates could cause credit crunches in developing nations.
China: There’s been a lot of economic change over the past year as China shifts its strategy to boost consumer demand in order to stimulate the economy. Before this, the nation relied heavily on investing, but that lead to concerns over sustainable gains, and debt incurred. It’s still very much in transition – if existing investments there go south, it could shave up to three per cent off the GDP.
The Year Of The Rate Rise?
Improving economies around the world present a bit of a catch 22 – as nations recover from recession conditions, the extraordinary measures that have kept interest rates low will be scaled back.
In Canada, this has meant the central bank keeping their Overnight Lending Rate at one per cent for over five years. In the U.S., the rate has been kept at 0.25 per cent in addition to the country buying its own bonds, referred to as Quantitative Easing. These buys have been cut from $85 billion per month to $75 billion – hence the great taper.
But it all comes down to market reaction. When Ben Bernanke first mentioned the possibility of a taper last July, they did not take the news well. Investors dumped their bonds driving yields, and fixed rates for mortgages, up. Things have since calmed, but it only highlights just how carefully the U.S. must proceed with reducing QE. The World Bank states that as long as rates rise gradually it’ll be a good thing, making nations less vulnerable to debt shocks.
So… Are Rates Going To Rise In Canada?
Bank of Canada Governor Stephen Poloz has made it clear that for rates to rise, the economy needs to put its money where its mouth is. Economic growth needs to be real, and sustainable before he pulls the trigger on the Overnight Lending Rate. He also debunked Finance Minister Jim Flaherty’s comments that “international pressures” could push rates higher – we’ll need to see some real numbers before there’s any movement.
But things are looking up for growth here in Canada. The weakening Loonie means new support for our export industry, which needs to “rotate” in as a main economic driver. This would take the pressure off of the housing market and household debt as economic supports. This could push consumers to spend more and drive inflation up to meet its benchmark levels, which would indeed prompt a rate rise. For the time being, we need to watch and see if such forecasted growth is realized, here and around the world.
Week In Review