Predictions 2014: Citi Research’s forecasts for 14 economies

It’s that time of year again when we all start crystal-ball gazing to decipher what 2014 holds for the global economy.

Over the next few days, this website will present the views of three top investment houses about what we can expect for developed and emerged markets next year. Kicking off the mini-series is Citi Research’s predictions for 2014 released in early December.

The report is titled “Global Economic Outlook and Strategy — Prospects for Economies and Financial Markets in 2014 and Beyond.”

The report notes that 2014 is likely to be “revolutionary” compared with previous years because of one key difference:  the likelihood of catastrophically damaging economic events, which could cripple the global economy, has reduced significantly (but not disappeared).

“Granted, the euro-area is still work in progress, China presents meaningful question marks, Congressional gridlock in the US could still throw sand in the federal fiscal wheels and geopolitics can always surprise,” it notes. “But, enough progress has been made that all of these issues seem less threatening today than 12 months ago.”

The research house also expects countries to continue implementing monetary and fiscal policies that broadly support global growth in 2014.

“More specifically, although monetary policy in some countries may turn less accommodative, the pace of tightening of fiscal policy among the world’s advanced economies is expected to slow,” it predicts. Structural reforms are also likely to continue in several parts of the world, although the measures are likely to be incremental.

Here are Citi’s predictions for 14  important economies, including one on the global economy.

1. Global Economy

Citi expects a modest increase in global growth in 2014, with more strength from the advanced economies than emerging markets. Global real GDP (at market exchange rates) is likely to expand 3.5% in 2014, with further modest increases in 2015 and 2015.

2. United States

A modest pace of growth is expected, with already increasingly strong cyclical forces gaining strength supported by easy financial conditions, even though Fed policy has begun to shift towards ending asset purchases in late 2014.

The ‘fiscal drag’ is expected to decline sharply next year too. GDP growth for 2014 is forecast at 2.75%, while the jobless rate is expected to fall to 6% by late 2015.

3. Eurozone

A crawling pace of recovery for the Continent is expected. GDP growth is estimated at 0.9 in 2014 and 1% in 2015.

The European Central Bank is expected to cut its key interest rates in the first half of 2014 and introduce unconventional monetary policy tools.

However, it remains doubtful whether a bout of US-style quantitative easing in the form of sovereign bond buying, will be introduced as a monetary measure.

4. United Kingdom

Citi is quite optimistic about the UK, raising the growth forecast to 3,2% for 2014, which is higher than estimates by other analysts. The jobless rate is expected to slide to 7% towards the end of 2014, and could lead to a modest tightening of monetary policy in 2015-16.

5. China

Steady economic and a stable job market should keep authorities firmly focused on structural reforms.

The recently-approved financial reforms package could help better improve allocation of resources, but growth could slow over the next two years. Citi expects economic expansion of 7.6% in 2013 and 7.3% for 2014, slightly higher than previously estimated.

6. Japan

A planned 3 percentage point increase consumption tax in April is likely to affect economic activity negatively, according to Citi.

More monetary easing from the Bank of Japan is expected in the form of government bond and risk asset purchases, most likely in June or July, after the consumption tax hike comes into effect. GDP growth in 2014 is estimated at 1.6%, down from the 1.8% growth expected in 2013.

7. Australia

Citi has lowered its 2014 real GDP forecast to 2.9% from a previous estimate. It also expects the Reserve Bank of Australia to start tightening monetary policy by early 2015.

8. India

GDP is predicted to increase 4.8% in 2014-15 (April to March), according to Citi estimates.

Key drivers include good monsoons in 2013-2014, a mild recovery in exports and measures to encourage business investments, such as the auction of coal blocks, a revision in gas prices and fast-track approval of investment proposals.

Inflation, however, will continue to hurt economic activity, forcing interest rates to stay high throughout next year and in 2014-2015. The upcoming general elections will also be important for India’s economy in 2014.

9. Korea

Citi expects the Korean economy to notch up a 3.7% expansion in 2014 on the back of a revival in exports and domestic demand. Exports, in fact, will be the top driver of economic growth.

10. Indonesia

Economic growth is set to slow to 5.3% in 2014 from an estimated 5.7% in 2013, as measures to lower imports and stabilize the economy start to bite.

Like India, Indonesia will head for crucial general and presidential election in early 2014. However, Citi doesn’t expect any dramatic changes to economic policy under a new government.

Interest rates are expected to remain high and the currency is predicted to weaken in 2014.

12. Singapore

A hesitant expansion for 2014 is predicted for the tiny island state amid uncertainties over external demand and supply-side constraints. Slowdowns in China and Indonesia could restrict the exports of goods and services.

Labour supply problems could seep through to overall costs, lifting core inflation in 2014, cautions Citi.

13. Brazil

Brazil’s economic performance will disappoint in 2014, says Citi, which estimates the South American nation’s GDP expansion at 2%, lower than 2013’s estimated 2.6%.

A weak currency and inflationary pressures are likely to lead the central bank to raise its policy rate further early in 2014.

14. South Africa

Persistent labour unrest could drag GDP growth to below 2% in 2014, well below the research house’s prediction of 2.8% growth in the absence of labour strikes.

A persistent current account and budget deficits, a weak currency and a tigntening bias to monetary policy could lead to another sovereign ratings downgrade, warns Citi.

Given the national elections scheduled for the second quarter, policies are unlikely to be bold in tackling economic problems this year, it adds.

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