Faster Global Growth, Low Inflation

This has been a week of predictions about global growth in 2014, more comments about low inflation and a surprising development about US Treasury securities.

The sky is brightening for the global economy, with relatively few dark clouds on the horizon. That’s the main conclusion in the latest global growth forecast from the World Bank, released on Tuesday.

The bank’s economists expect the overall growth rate for 2014 to come in at 3.2 percent in 2014, up from 2.4 percent last year. Last June, the bank projected 3 percent global growth for 2014. There’s still a way to go. As recently as 2010, the world economy expanded by 4.3 percent.

The new, higher number for 2014 is based primarily on improving economies in the US and euro zone. “This strengthening of output among high-income countries marks a significant shift from recent years when developing countries alone pulled the global economy forward,” the bank said in its Global Economic Prospects report, which is published twice a year.

The World Bank thinks that easing of austerity policies in developed economies will boost their growth, while also helping to stimulate developing markets’ exports. “The performance of advanced economies is gaining momentum, and this should support stronger growth in developing countries,” said World Bank president Jim Yong Kim.

The 2014 forecast for the developed nations was raised to 2.2 percent from 2 percent last June.

US growth is seen accelerating to 2.8 percent this year from 1.8 percent in 2013. Federal budget cuts should have a smaller negative impact on growth in the future, the World Bank said.

Japan is expected to grow 1.4 percent. But the bank also cautioned that the government’s promised economic reforms “have disappointed thus far, raising doubts about whether the improvement in economic performance can be sustained over t! he medium to longer term.”

The euro region’s economy should grow 1.1 percent, according to the bank. The euro zone seems to have turned a corner, with economic-policy and financial uncertainty significantly eased. Spain, Ireland and Portugal have started growing again, and the contraction seems to have slowed in Greece and Italy.

“The euro area is where the US was a year and a half or two years ago, where growth is starting to go positive but it’s still hesitant,” a bank spokesman said.

However, the 2014 number for developing markets was cut to 5.3 percent from 5.6 percent in June.

The World Bank lowered its forecast for China from 8 percent to 7.7 percent; for India from 6.5 percent to 6.2 percent; for Brazil from 4 percent to 2.4 percent; and for Mexico from 3.9 percent to 3.4 percent.

But the bank said growth, although slower could be more stable than before, driven by improving economic fundamentals rather than cheap money and financial bubbles. Among the caveats: China must deal with a vulnerable banking sector and overinvestment. India is struggling with inflation and currency depreciation.

The bank’s forecasts depend particularly on the orderly tapering of the Federal Reserve’s quantitative easing program, which started this month with the trimming of monthly bond purchases from $85 billion to $75 billion. The Fed’s program has helped push down interest rates and eased money flows around the world. Still, faster growth in developed economies likely will offset any negative impact from reduced inflows to emerging markets.

Also this week, the head of the International Monetary Fund warned that deflation in the developed economies threatens to derail a strengthening but still fragile global recovery. Therefore, central banks in the US and Europe will need to keep easy money flowing, as Japan also is doing.

“With inflation running below many central banks’ targets, we see rising risks o! f deflati! on, which could prove disastrous for the recovery,” IMF Managing Director Christine Lagarde said. “If inflation is the genie, then deflation is the ogre that must be fought decisively,” she said.

Last week, European Central Bank president Mario Draghi, referring to rising concern about deflation risks, strongly stressed that the bank’s policies will remain accommodative as long as necessary.

Inflation is also low in the US. We learned this week that consumer prices here ended 2013 with the smallest annual increase since 2008. The 1.5 percent advance for the year came after a 1.7 percent increase in 2012. This is the first time since 1997-98 that the CPI has gone up less than 2 percent in consecutive years. The Federal Reserve has a target rate of 2 percent.

The Dollar Still Reigns

Despite cries from the lunatic fringe that the US dollar will soon surrender its role as the world’s reserve currency, news came this week that China’s US Treasury holdings rose to a record in November. The more Treasury issues held by China and others, the less likely it is that the dollar will be replaced any time soon.

The dollar was supposed to suffer as the Fed printed all that money and disgruntled foreign investors unloaded Treasuries, sending interest rate soaring and the dollar plummeting. It hasn’t happened yet.

China’s Treasury portfolio increased $12.2 billion to a record $1.3167 trillion in November, according to US Treasury Department data. China is the biggest foreign investor in Treasury securities.

Some commentators think this is a bad thing because China theoretically could dump all of those Treasuries at some point, sending the dollar into a freefall. The catch is that there’s no way China could do that without seriously damaging its own currency and economy.

Is it possible that the dollar at some point will lose its position as the world’s reserve currency? Yes, but it wouldn’t happen ov! ernight. ! First, there would have to be another reserve-currency alternative.

By the way, Japan also increased its Treasury holdings, which now stand at $1.1864 trillion, right behind China.

Then, of course, there’s the Federal Reserve. It currently owns more than $2 trillion of Treasury debt, more than any other investor in the $11.8 trillion Treasury bond market.