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A Year of Promise

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By Peter G Hall *
Vice-President and Chief Economist Export Development Canada

Five years beyond the crisis, we are still looking for that solid year of growth that puts us conclusively beyond the lean years. Compared with known history of the economy’s ups and downs, five years is an extremely long time to wait for a return to anything like normal. Can we expect that 2014 is going to be any different? Here are six reasons to believe that things are finally on the up-and-up.

First, leading indicators are pointing up. In past weeks, I have talked about leading indicators, their usefulness, which ones to watch, and those to ignore. These arguments aside, it is clear that when all the leading indicators are added up and plunked in to the OECD composite leading indicator, what you see at the moment is thirteen months of successive increases. This hasn’t been the case in the period immediately following the huge global outpouring of fiscal stimulus in 2009-10. If the leading indicators are really rising together in a sustainable way, it’s pointing to a new upsurge of growth.

Next, we have clear evidence of pent-up demand. This has been obvious in the US economy for a while, and has already pushed leading sectors upward – aggressively. There is now evidence of pent-up pressure in the EU and even in Japan. It stands to reason, as households can only put off purchases for so long before the cars need repairing or replacement, the appliances break down, the roof needs shingling, and so forth. The same is true for businesses – even if they are not using all of their capacity, machinery is getting older, prone to breakdown or just not competitive any more. As such, we are seeing that increasingly, consumers and businesses have to spend.

But now, they just don’t have to spend – they want to. One of the most significant developments in the large economies of late is the return of confidence. It’s a hidden factor in the economy, usually operating in the background – but for the best part of five years, it has been absent, lurking at recessionary levels. About six months ago, it reappeared in the normal zone, in the US, and has hit post-crisis highs in Japan and the EU. This neo-willingness to get active in the economy is long overdue, and suggests that a ramp-up of activity in 2014 is already psychologically there.

A fourth factor is the fiscal situation. Austerity came hard on the heels of stimulus, as governments realized they had grossly underestimated fiscal deterioration. For years, public sector scrimping has taken lots of oomph out of the economy. But the worst of austerity is now behind us in the EU, and US cutbacks are expected to be less scathing in 2014. Even Japan has a sanguine outlook on the fiscal side. This collectively suggests a type of fiscal dividend – not a spending spree, but an economic growth spurt that is the result of the cessation of deep austerity. It’s already lifting growth.

Add to the list the windup of monetary stimulus. Cloaked in the term ‘tapering’, just the mention of it caused a great stir last May. The point of mentioning it is that neither the term nor the topic would be in the discourse if it weren’t for growth. Without growth, there is no need for tapering. Central banks must see that the world economy is gaining momentum. Otherwise, there would be no need for any taper-talk, let alone plans for a fuller withdrawal of excess cash.

A final observation is the general talk itself. ‘Chatter’ is not normally a great influencer, as there are typically quite diverse opinions on the economy. However, there has been a decided tilt in public discourse in the post-crisis period toward panic – the next cliff, the next significant political event, the next scandal – in a way that has fed gloomy expectations. It seems quite significant, then, that over the past six months, general chatter has made a shift: growth-gab is now all the rage.

The bottom line? It has been a long time coming, but there is a growing pile of evidence that suggests 2014 is going to mark a significant positive departure from recent experience. Have a happy year!


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