The net impact of the government shutdown on US growth will be -0.3% of GDP. While October ISM bear the imprint of the shutdown, a sharp rebound in the November indicators is widely expected, a rebound that will support our expectations that the start of tapering will be announced at the January FOMC meeting. Less resonant, the increase in real salaries (1% yoy) and in new orders (ISM component is 6 points above average), the improvement in the financial situation of households (decrease in mortgage liabilities of 25 points in relation to GDI, wealth effect), the slighter fiscal consolidation going forward (0.5% of GDP vs. 1% ex-post this year) suggest that US growth will accelerated in 2014, we estimate to 2.2% from 1.5% in 2013.
As regards our expectations for 2014 and 2015, a core assumption is that productive investment will strengthen further in the US (and reach 10.5 points of GDP, exceeding the 2008 cycle peak) and finally in the UK, with internal and external financing conditions that are favorable for Anglo-Saxon firms (stable debt, high earnings, low real interest rates), a decline in energy costs in the US (2% of GDP) and stronger-than-expected global demand. The OECD’s leading indicator still points to an acceleration in global trade in volume, with 5% 12 months out compared with 2.6% currently. In the Eurozone, on the other hand, Germany and perhaps Spain are the only countries where conditions are favorable to a pick-up in productive investment beginning in 2014.
In Japan, growth will continue to strengthen until next spring, as private domestic demand is boosted artificially ahead of the fiscal shock. As a new stimulus plan has been penciled into the budget, the country will not dip back into technical recession, but the 3 point hike in VAT will lead to a sharp trend reversal from next April. So far, inflation expectations have picked up, but this has being fuelled by a deterioration in the terms of trade (energy, yen) and VAT. The success of “Abenomics” rides on their being a rise in salaries, which is still not happening.
While growth prospects are brightening up in developed economies, they grow more sombre by the day in emerging countries. The foreign exchange crisis this summer somewhat dried the funding of their current account deficits and prompted some central banks to raise rates. This negative shock comes in a context where the structural weaknesses of emerging countries in terms of infrastructures, labor skills and income inequalities call for a correction. While liquidity will not be lacking, as the Bank of Japan (set to flood the market with the equivalent of 7 points of liquidity at global level over the next 18 months) will more than offset the Federal Reserve (1 point of liquidity in 2014 if there is tapering, against 6 points in 2013), emerging markets will enjoy far less support for an extended period if the Federal Reserve does indeed taper asset purchases.
As regards the ECB, our view remains that all easing options are still on the cards. Monetary conditions in the Eurozone have tightened markedly, as a result of both the euro’s appreciation and the fallback in inflation (energy and underlying components). By comparison, monetary conditions have been stable this past year in the US and in the UK, and rarely have they been this accommodating in Japan. While new projections for inflation by the ECB staff could be the factor that triggers an interest rate cut in December at the latest, our view is that a further injection of liquidity is far less pressing, as the unveiling of the AQR methodology at end-October did not greatly unnerve the market and since Mario Draghi is more evasive as to the minimum level of surplus liquidity that is needed.
All in all, our global view is further supportive to risky assets in developed economies (Europe must be differentiated). Ample liquidity, moderate upswing in nominal growths and active communication of the major central banks should prevent a bear steepening the main FI curves. Risks associated to this scenario are of course plentiful: from further political dreadlocks in the USA over political instability in Europe and banks’ capital squeeze in the wake of the Asset Quality Review. In any case, volatility is set to last.