Will the global economy be better this year?

As is now customary it seems, financial markets ended last year and began this year by expecting “better things” from the global economy. Once again, though, these expectations are now under pressure as Europe’s nascent economic recovery (particularly within the Periphery) has apparently run out of steam, Japan’s underlying economic data has remained lacklustre, growth within the Emerging Markets has stalled and even the US has begun to produce some notably more equivocal data that does not seem to be merely the result of some inclement weather in the Northeast of the country.

In practice, we suspect that much of the optimism over the outlook for the global economy in 2014 had been based on the prior strength that had been visible within the financial markets; although global equity markets possess a rather uninspiring record as economic forecasters, there is always a tendency for analysts to raise their growth forecasts following a sharp run up in asset prices and this certainly seems to have been the case in late 2013. We would argue, though, that markets should not in fact have been too surprised that the global economy has failed to live up to expectations given that in most countries and indeed regions around the world, household income trends remain very depressed. For example, in the USA, household real disposable incomes may be 2% higher than they were this time last year but there has been negligible growth in real incomes since the middle of 2013 despite the reported increase in the number of employed people. 

Similarly, in Japan, we find that real wages have fallen by 1.5% as nominal wage inflation has remained low but the weak Yen has led to an increase in people’s everyday cost of living. Even if we make allowance for the slightly better employment situation in Japan of late, we find that the fact remains that Japanese total household incomes are lower than they were a year ago and on this score at least we can see that Abenomics and the “money printing” by the central bank that it instigated has if anything backfired on its instigators. Meanwhile, in Continental Europe, it is clear that real disposable incomes have fallen for the last three years while in the supposedly strong UK, household real disposable incomes have been essentially flat for 18 months – the recent rise in UK spending has been financed not from income gains but from the “one-off” compensation payments that the banks have been obliged to pay to households for “insurance mis-selling”.

Quite simply, it would appear that particularly developed world households – although many of the Emerging Markets have the same issues – have simply not had the real income growth that would allow them to spend more without having to resort to the heavy use of credit and we find in the post-2008 world that few banking systems or potential borrowers are prepared to return to the old deficit spending models of behaviour that were popular prior to the GFC.  Hence, global consumer spending trends, particularly in nominal terms, have remained weak despite the optimistic predictions that were being made at the beginning of the year.