A long expansion in the global and U.S. economy is expected to last for a total of eight years (2009 to 2017) according to BNY Mellon Chief Economist Richard Hoey in his most recent Economic Update entitled, “Eight-Year Economic Expansion.” Global GDP growth should accelerate by one-half to three-quarters of one percent faster than in 2012 and 2013.
“Because the global and U.S. economy grew at only a slow pace since the recession low in mid-2009, the upsurge of inflation that one would normally expect to occur after many years of economic expansion has not occurred,” Hoey says. “As a result, developed world monetary policy is not poised to become aggressively restrictive in order to stifle inflation any time soon, but rather can remain stimulative for an extended period of time. It is true that the central banks of the U.S., Japan and the Eurozone are worried about inflation, but they are worried that inflation is too low.”
While Hoey believes that inflation will rise eventually, he thinks it will drift higher only gradually over the coming years and that governments and central banks will be tolerant of that gradual upward drift in inflation.
“We expect that a gradual upward drift in wage inflation, core inflation and reported inflation over the next several years is likely to be well-tolerated by (1) public opinion, (2) governments and (3) central banks,” says Hoey. “In the U.S., it has been three and a half decades since the double-digit inflation peak in 1980. The share of labor compensation in GDP is near the lowest level in half a century. In that context, a gradual upward drift in domestic wage inflation over the next several years should be well-tolerated by most and welcomed by many.”
Hoey believes that the U.S. economy expansion will go through three phases: (1) four years of growth averaging about 2%, which ended in mid-2013, (2) a minimum of three years of growth averaging about 3% and (3) a slower pace of growth in the final quarters of the eight-year expansion.
Sustainable economic expansion in the Eurozone
While Hoey cites long-term Eurozone challenges, including an aging demographic, high energy prices, excess debt, an elevated currency due to its current account surplus and a fragile financial system in peripheral Europe, he expects a sustainable economic expansion in the Eurozone, with the pace of real GDP growth in 2014 in the 1% to 1.5% range.
Japan: uncertainties over the long term
The country faces a “very choppy year in 2014” due to the increase in the value-added tax scheduled for April 1. Consequently, Hoey expects sharply declining economic activity for three or four months, followed by renewed expansion. Hoey is more uncertain about the long-term outlook, given challenging demographics and debt ratios.
China: the most complex issue
Hoey believes that the most complex issue in the global outlook for 2014 is the Chinese economic and financial outlook. Stating that the Chinese government has a choice whether to rebalance the economy and financial system gradually or rapidly, Hoey expects Chinese 2014 economic growth can persist gradually at about the same pace as in 2013, roughly 7.5%.
“Overall, we believe that global economic growth should accelerate in 2014, 2015 and 2016 to a growth rate one-half to three-quarters of 1% faster than in 2012 and 2013,” Hoey concludes. “We expect an ‘eight-year economic expansion’ in the global economy and the U.S. economy.”