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Surveying the 2014 economic landscape

2013 was undoubtedly a good year for financial markets, thanks mainly to the Federal Reserve and the European Central Bank continuing to adopt a benign low-interest regime, as well as administering varying doses of quantitative easing to provide as much liquidity as possible. Bond and equity markets responded with enthusiasm, and capital markets seem to have already factored in a steady recovery starting in 2014.

But are international analysts right in declaring the end of the longest economic recession in modern times? For the past several weeks various analysts have published forecasts on how they see the various world economies progressing in 2014. Some concentrate on the financial markets, while others are more interested in the real economy. These two realities should be correlated, but in the last few years they were not.

For most people who have to earn their living on a daily basis through their employment, it is the real economy that counts. Many are predicting that the worst of the recession that started in 2008 is now really over. This is probably true, even if the recovery is sluggish almost everywhere and not accompanied by jobs growth.

As usual, it seems that the US will lead the return to economic growth. Apart from benefiting from a benign monetary policy, the US has the advantage of having a liberal labour market that makes it easier to hire and fire people. Many European economic strategists disagree with this philosophy, but it is a fact that European entrepreneurs are afraid of hiring more people because, if things turn out to be tougher than expected, it will cost them too much to downsize again.

So economic growth in Europe is likely to continue to be sluggish during 2014. This is not too bad as for the past year Europe’s economy did in fact shrink. But we will only have reason to be optimistic about Europe if our politicians sort out the governance issue of the Union sooner rather than later.

The agreement on the setting up of a Banking Union is a step in the right direction, but the risks of this mechanism not working are not low. Because of conflicting national interests, the Banking Union process seems to be over-engineered, with too many bureaucratic hurdles to be overcome before a crisis can be nipped in the bud.

But the underlying weakness of Europe remains its loss of competitiveness in the last few decades. European industry has generally stopped investing to modernise its operations and apart from the financial services sector, manufacturing and other high-value-added services industries are lagging.

We need to instil a sense of urgency because the risks we are taking in the area of public services are increasing

The European Central Bank is doing a good job of keeping countries with serious public finance problems afloat despite an onslaught from speculators. The low interest rate strategy has helped to some extent, but on its own it will never compensate for the lack of investment in the real economy, which is stifling economic growth.

As always, much will also depend on factors over which individual countries have little or no control. So far there is no major political crisis on the horizon, but no-one can guarantee that such a crisis will not erupt at some time in 2014. This would be undoubtedly bad for business.

The price of oil is another factor that can greatly influence the world economy in the coming months. The price of Brent crude oil has been fluctuating around $110 per barrel for several months. Some analysts are predicting that this may go down to $90 if Iran and Libya resume their oil exports, while demand for oil will continue to be subdued because of slow global growth. A lower oil price will help companies as well as families who have seen their spending power badly eroded in the last five years.

The economic challenges that we ourselves face remain substantial. The battle to sanitise our public finances is showing signs of being won. We then have to address the quality of our public services which cry out for reform. I am referring in particular to our health, education and pensions systems. The viability of these services remains at risk unless we undertake a root-and-branch reform.

The government seems to be determined on these fronts, but we need to instil a sense of urgency because the risks we are taking in the area of public services are increasing. Trade unions also need to make these reforms part of their agenda.

johncassarwhite@yahoo.com

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