Yes, economy getting better all the time

Reuters news agency columnist Anatole Kaletsky gives five predictions for financial markets in 2014

HAPPY New Year! For the first time since 2008‚ we investors‚ economists and businesspeople say these words without irony.

While last year was statistically disappointing‚ with global growth slowing slightly from 2012 and apparently belying the optimism expressed here last January‚ the verdict of financial markets and business sentiment has been much more consistent with my predictions.

So what unexpected developments could surprise financial markets and business sentiment in 2014?

Below are five personal guesses – some possibly far-fetched and others seemingly obvious‚ but none yet fully reflected in market prices:

1. Four is the new two.

I think the US economy will grow about 4% – much faster than the 2.5%-3% predicted by the International Monetary Fund and mainstream economic forecasts. My reasoning is simple. In the last reported quarter‚ the US economy was already growing 4.1% and the private sector 4.9%. With US budget battles now over and short-term interest rates firmly anchored at zero‚ there is no reason to expect a slowdown.

If the US accelerates to about 4%‚ so will global growth and 4% will replace 2% as the growth rate assumed in business and financial planning.

Global inflation expectations will also rise to about 3%‚ raising the benchmark for global growth in nominal terms to about 7%‚ very similar to the 10 years before the 2008 financial crisis.

2. The big trends of 2013 still have a long way to go.

While the gains of more than 20% in major stock markets may not be repeated this year‚ equity prices in most of the world should continue rising – and bond prices continue falling.

Stock market optimism seems justified for two reasons. Wall Street has now decisively broken a 13-year trading range‚ and past experience suggests that this breakout signals the start of a bull market in global equities that will last for many years.

3. The European crisis will metastasise from economics into politics.

Unfortunately European central bankers have a very different world view. They see rapid growth as a portent of inflation and will start hinting at tighter money as soon as economic conditions improve.

4. Japan will shoot itself in the foot – again.

Japan is the major economy most likely to disappoint expectations in 2014. The consumption tax increase in April will produce a fiscal tightening worth roughly 2% of GDP‚ after allowing for some feeble offsetting measures. As a result‚ Japan will probably sink back into recession by the second quarter and the stock market will fall sharply. The yen is likely to weaken even more.

5. Emerging markets will make a comeback — perhaps in unlikely places.

With the US accelerating to 4% and China growing steadily in the 7%-8% range‚ emerging markets will come into their own as investors realise that most of these economies have more to gain from robust economic conditions and stronger commodity prices than they have to lose from slightly higher interest rates.

But at this point I am probably getting too optimistic, even for a pipe dream.