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2014 Global Economic Outlook Summary

Core Content

This document outlines the 2014 global economic outlook from Samsung Securities' Global Economics Team, focusing on developed markets (DMs) and emerging markets (EMs). It highlights the expected gradual global economic recovery, normalization of DM monetary policies, and increasing disparities among EMs. The report also discusses regional economic outlooks, monetary policy shifts, and implications for financial markets and currencies.

Main Points

1. Global Economic Outlook

• Gradual recovery: The global economy is expected to recover gradually as the US rebound spreads to the eurozone and Japan.
• DM monetary normalization: After the Fed starts tapering, DM monetary policies will normalize, which will have significant implications for EMs.
• EM disparities: EMs will experience deeper economic disparities, with high-risk EMs facing more challenges than low-risk ones.
• GDP growth: Global GDP is projected to grow at 2.9% in 2013, 3.3% in 2014, and 3.4% in 2015, based on PPP exchange rates. Using weighted average exchange rates, growth is expected to be 2.7–2.9%.
• Inflation trends: Global inflation is expected to remain stable, with DMs seeing a slight increase and EMs experiencing a small decline.

2. Regional Economic Outlooks

US

• GDP growth is expected to reach 2.9% in 2014 and 3.1% in 2015.
• The economy will transition from recovery to full expansion early in 2014.
• The Fed is likely to start tapering in 1Q14, with the first rate hike expected in 2Q15.
• US unemployment is projected to reach 6.5% in 2H14, prompting rate hike expectations and a rise in long-term interest rates.
• 10-year US Treasury yields are expected to rise to 3.5% by end-2014.

Europe

• Eurozone GDP is expected to grow 1% in 2014, with a modest recovery.
• The ECB is likely to maintain a neutral fiscal stance in 2H14.
• The ECB may continue to ease monetary policy if banks face capital shortfalls, but the overall trend is toward normalization.
• The Bundesbank is concerned about housing price bubbles in major German cities.

China

• China's GDP growth is expected to slow from 7.6% in 2013 to 7.0% in 2014 due to structural reforms, debt restructuring, and real estate cooling measures.
• The central bank will likely delay rate hikes to support growth and manage inflation.
• The reform momentum between November 2013 and March 2014 is expected to have a significant impact on economic performance.

Korea

• Korea's GDP is projected to grow from 2.7% in 2013 to 3.2% in 2014 and 3.4% in 2015.
• Domestic demand is expected to recover, driven by the real estate market and improved business sentiment.
• The Bank of Korea will likely keep interest rates frozen to support economic growth.
• The won is expected to weaken against the US dollar as the Fed starts tapering.

Key Implications

• Equity return gap: The equity return gap between high- and low-risk EMs is expected to widen due to Fed tapering and rising interest rates.
• Capital flows: EMs with current account deficits will likely face capital outflows and currency depreciation as DM monetary policies normalize.
• Currency movements: The US dollar is expected to appreciate in 2H14, with KRW, EUR, and JPY weakening against it.
• Fiscal and monetary policies: High-risk EMs may need to tighten fiscal policies and raise interest rates to manage deficits and inflation, which could hurt domestic demand.
• Global coordination challenges: As global imbalances shift, coordination between DMs and EMs may become more difficult, potentially leading to currency and trade conflicts.

Key Information

• DMs: Expected to lead the recovery, with the US growing strongly and Europe and Japan recovering more slowly.
• EMs: Divided into three risk categories: high risk, mid risk, and low risk based on fiscal balance, current account status, and policy flexibility.
• Interest rates: The Fed is expected to start tapering in 1Q14 and raise rates in 2Q15, with a significant impact on long-term interest rates and currency values.
• Inflation: DMs will see a slight increase in inflation, while EMs will face disinflationary pressures due to slowing growth.
• Forex rates: The report provides forex rate assumptions for the end of 2014, including USD/EUR, JPY/USD, and KRW/USD.

Summary Table

Conclusion

The 2014 outlook is characterized by a gradual recovery in DMs, monetary policy normalization, and increased disparities among EMs. The Fed's tapering and rate hike expectations will be a major driver of currency movements and capital flows, with high-risk EMs facing the most significant challenges. Low-risk EMs, such as Korea, China, Taiwan, and the Philippines, are expected to maintain fiscal and monetary flexibility, while mid-risk EMs like Thailand and Malaysia will need to manage fiscal and current account issues. The global economic landscape is expected to become more divergent and volatile, with greater uncertainty for EMs.