"Dull and old" economies will have their strongest performing year since 2010 and will drive the global recovery in 2014, according to Chief Economist Dr. Nariman Behravesh of IHS, Inc.
Ahead of the 2014 World Economic Forum in Davos, Switzerland, Dr. Behravesh commented: “According to IHS estimates, in 2014, emerging markets will contribute the least amount to global growth since 2010. Economies considered ‘dull and old,’ like the U.S., U.K., Germany and Japan, will actually be 2014’s new locomotives of growth.”
“The keys to understanding the growth slump in the advanced economies, and the nascent rebound, are the twin headwinds of private-sector deleveraging and public-sector austerity,” says Behravesh. “Fortunately, these twin headwinds are now easing.”
Behravesh notes that substantial progress has been made in reducing both public- and private-sector debt, especially in the United States. "American households and banks have aggressively reduced debt levels, while the U.S. public-sector debt has been stabilised. Europe, as well, has made progress on fiscal austerity,” he said.
However, Behravesh cautions that Europe’s story was not all good news, noting that in Europe, private-sector leverage, especially in the banking sector, remains at troublingly high levels.
“We are seeing rising labor costs in the emerging world, stagnant wages in the developed world and low energy costs in North America. As a result, we will likely see a re-balancing of global investment flows back into ‘dull and old’ economies,” he adds.
The BRICS party is over
“There has been an alarming deceleration in the emerging world in the past four years. This has little to do with the ‘taper panic’ that gripped financial markets in the spring and summer of 2013. In actuality, the most daunting challenges facing emerging markets are structural,” says Behravesh.
Behravesh explains that 'BRICS party' of the 2000s was fueled by three global drivers: a credit boom, a commodities 'super-cycle' propelled in large part by China’s double-digit growth rates, and 'hyper-globalisation' as multinational corporations expanded global supply chains. "All three of these drivers have lost their steam, leaving many emerging markets high and dry,” he said.
Behravesh concludes that without major microeconomic reforms that would open up labor and product markets, reduce fiscal burdens, and lower unit labor costs via productivity gains, "a return to the ‘BRICS party’ of the 2000s is unlikely."