Ignacio de la Torre. Professor. IE Business School
14 January 2014
My six predictions for 2014 are summarized in a seventh: namely that it will be a good year for the world economy, and especially for Spain, which will actually grow more than the government says.
I tend to be very skeptical about forecasts made by economists, including my own efforts. That said, the battle for ideas is what keeps the world moving, be it forward or backwards, which is why I have once again decided to pitch in with a few tentative predictions.
First: The price of raw materials will continue to fall in general. Gold prices will keep going down, until they are close to the cost of production. Drops in the price of oil will be moderate depending on the size of geopolitical risk premiums introduced a few years ago. The price of materials used by industry will follow a downward trend as a result of higher rates of production fuelled by the high prices seen in recent years, coupled with lower marginal demand in emerging countries, particularly China.
Second: interest rate curves in the US and Europe will continue to see a steepening of the yield curve as long-term rates continue to rise at a moderate pace and short-term rates are kept at extremely low levels by central banks. The rise of interest rates in the long term will be a result of: i) a marginal tendency to invest rather than save as a result of improvement in the economy, which will in turn increase the real interest rate; ii) the fact that the price of ten-year bonds will continue to return to a more normal (i.e. lower) level, given that current prices are unusually high; iii) inflation can also be expected to return to normal levels toward the second half of 2014 as labor costs in the US begin to rise faster than underlying inflation. This steepening will benefit the finance sector, given that profit levels will rise in lockstep with the steepening process. It will also be good for the economy, given that steepening will provide an incentive for the finance sector to start giving loans. The obvious risk is that there may be an inflation scare at the end of 2014.
Third: the euro will continue to be subject to monetary readjustment. The ECB will not be able to implement aggressive quantitative easing measures like those meted out by the FED, which will lead to a slow but steady flow toward the euro. Meanwhile, the enormous advances made in recent years in the architecture of the eurozone will mean that international investors will increasingly see the euro as an alternative reserve currency. This in turn will result in a gradual increase in euro reserves, which will strengthen the euro even more, although this could harm European exports.
Fourth: the weight of capital markets will rocket in the eurozone. Europe is still enormously dependent on banks, compared to the US. This dependence has begun to wane thanks to the development of capital markets, a process which will intensify in 2014. The reopening of securities markets providing loans for SMEs will play a key role in the reactivation of European credit lines for small and mid-sized enterprises, and this will also occur in 2014.
Fifth: China will take far longer than the West expects to implement the structural reforms announced during the latest plenary session of the Communist Party. This means that macro data will not reflect the relevance of these measures at all, and the economy will not accelerate as many analysts thought it would, but rather it will remain stable with growth rates of around 7 or 8%. I assume that the Chinese are not as worried about this as Westerners are, given that the two cultures have very different concepts of time. As a Chinese premier said during an address to the US Congress at the end of the nineties: “China has always done things well. It’s only over the last couple of hundred years that it has got things wrong.”
Sixth: Real estate prices in Spain will stabilize as early as 2014, bringing an end to five years of price falls of up to 45% in some cases. It is true that at 5.7 times the average income, homes are still expensive compared to the historical average of 4 times the average income, but there are three reasons that could lead us to expect them to stabilize at a higher ratio than normal: a) the amount of liquidity injected by central banks, totaling over 20% of GDP, three times more than the historical average (the prices of assets are directly affected by this large amount); b) the price of said liquidity (the interest rate), which is at a far lower level than the historic average (the multiple is also affected by this “price”); and c) the arbitrary difference between house prices and level of income, which occurs when the price is attractive for foreign investors - this difference is caused by the massive entry of foreign buyers, which has been happening since 2013, and which means that a pure comparison between price and national income stops making sense to a certain degree. The result of all the above points will be increased market liquidity, which will help ease excess supply until prices level out.
I once heard that economists are the only professionals lucky enough to get paid twice – once to get things wrong, and then again to explain why they got it wrong. But if there were no forecasts there would be no mistakes, which would mean there would be no ideological debate. And that debate and diversity of opinions is precisely what is needed to provide help with investment decisions in the current difficult scenario.
And here is the seventh and last prediction, which is that I am going to be a little less skeptical. 2014 will be a good year for the world economy, and particularly for Spain, which will grow at a faster rate than that forecast by both the government and consensus among economists.