Happy New Year! For the first time since 2008, we investors, economists and businesspeople say these words without irony. While last year was statistically disappointing, with global growth slowing slightly from 2012, the verdict of financial markets and business sentiment has been much more consistent with my predictions. Despite the apparent slowdown, stock markets enjoyed their best performance since the 1990s, long-term interest rates soared and consumer confidence all over the world ended 2013 much higher than it started. This apparent paradox is easily explained: the statistical weakness of 2013 was due entirely to a very weak period last winter, connected with the US presidential election and leadership transition in China. By the second quarter, growth had revived in the US and China and accelerated strongly in Britain and Japan.
That conventional wisdom last January was far too pessimistic about the economic outlook is evidenced by the subsequent behaviour of financial markets, where equities outperformed bonds by the biggest annual margin on record. But today almost everyone is optimistic. So what unexpected developments could surprise financial markets and business sentiment in 2014? Below are five personal guesses:
Four is the new two
The US economy will grow by about 4%, much faster than the 2.5% to 3% predicted by the IMF and mainstream economic forecasts. In the last reported quarter, the US economy was already growing by 4.1% and the private sector by 4.9%. If the US accelerates to around 4%, so will global growth, and 4% will replace 2% as the growth rate assumed in business and financial planning. Global inflation expectations will rise to around 3%, raising the benchmark for global growth in nominal terms to 7%, similar to the 10 years before the 2008 financial crisis. In other words, the “new normal” of global stagnation widely predicted after the crisis will turn out to be not very different from the old normal.
Still a long way to go for 2013 trends
While the gains of over 20% in major stock markets may not be repeated this year, equity prices in most of the world should continue rising—and bond prices continue falling. Wall Street has now decisively broken a 13-year trading range and past experience strongly suggests that this breakout signals the start of a bull market in global equities that will last for many years. Shifting from history to financial fundamentals, the 6% or 7% nominal growth I expect in the global