Yes, it’s that time of year again. Opening presents under the Christmas tree. Battling crowds at the shopping malls. Making New Year’s resolutions we have no intention of keeping. And asking what has become a perennial question: Will the next year finally bring the financial crisis to a close?
Ever since the collapse of Lehman Brothers in 2008, a scarred world has been wanting a positive answer. Each year brings new hope; each year has seen that hope dashed. Will 2014 be any different?
Much recent economic news is cause for holiday cheer. In the U.S., the recovery seems to be picking up steam. Third-quarter GDP growth for the world’s largest economy was recently revised upward to an annual 3.6%, while a healthy job market in November dropped the unemployment rate to 7%, the lowest in five years. In the eurozone, the financial turmoil caused by its sovereign debt crisis has been quelled, along with its worst-ever recession, and next year the common-currency union looks poised to return to positive growth. China has so far dodged worries about an earth-rattling “hard landing,” with growth slower but still enviable. Even stodgy Japan has stirred to life, thanks to some unorthodox policymaking by Prime Minister Shinzo Abe. Overall, the IMF expects 2014 to see a hefty boost to world growth, to 3.6% from 2.9% this year.
There are other encouraging signs that the momentum can be sustained. A bipartisan budget deal reached this month by the U.S. Congress could alleviate some of the political uncertainty that has plagued the American economy. A recent agreement to cut trade-impeding red tape at the World Trade Organization – the first pact reached in its 18-year history – suggests that governments have become more willing to set aside parochial interests to boost global commerce.
Yet dangers remain. With the U.S. economy improving, the Federal Reserve will likely begin to scale back – or “taper” – its large bond-buying program aimed at stimulating growth. Unwinding such a massive and extreme policy will be unprecedented, and the consequences on global financial markets are thus uncertain. In mid-2013, the mere suggestion from the Fed that it may begin tapering sparked global chaos as money stampeded out of emerging markets that were thought to be risky, such as India and Indonesia, tanking their currencies and stock markets.
The world’s most advanced economies are also far from stable. In Japan, Abe must press ahead with tough reforms, such as liberalizing over-protected markets, in order for the country’s revival to gain speed. Europe, too, isn’t out of the woods just yet. Fears that the region could tumble into debilitating deflation have been on the rise. Even though sick economies like Italy and Spain have been on the upswing, they still suffer from huge spare capacity, while the performance of the supposedly healthier “core” economies, like France, remains tepid. That’s why research firm Capital Economics recently declared that in Europe “the crisis is not yet over.”
Just as worrying is the state of the world’s big emerging markets. Countries like China and India had shaken off the worst of the Great Recession and their growth helped prevent an even deeper downturn. But now they’ve fallen on hard times themselves. India is in the middle of its most severe slowdown in a decade, and with a general election looming in 2014 it is uncertain when squabbling politicians will restart the free-market reforms necessary to spur faster growth.
Policymakers in China are attempting to rein in rising debt while embarking on bold reforms that would open up financial markets and improve bloated state-owned enterprises – a complicated, politically sensitive process that could drag on the nation’s economic ascent. Investment bank Nomura projects that China’s GDP growth will slip under 7% in 2014. The last time that happened was 1990.
Most importantly, though, the top-line improvement in the global economy hasn’t completely trickled down to Main Street. Unemployment in the eurozone remains at a biting 12.1%, while more than 47 million Americans are stuck on food stamps, only marginally fewer than a year ago. Until the lives of all those who suffered during the financial crisis are repaired, it will be impossible to say it has truly ended.