Growth: Fact or fiction?

Figure 4 – CEOs are turning back to certain advanced economies for growth

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Figure 5 – US household debt as a proportion of GDP

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Figure 6 – Breakdown of sources of economic growth

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CEOs see rosy outlook for advanced economies

One of the central messages coming out of Davos last month was the clear shift in CEO sentiment in favour of advanced economies. This, in turn, was driven by the improving growth outlook in advanced economies. Our Global CEO survey, which was launched at Davos, shows that the shift was strongest in the US, closely followed by Germany and the UK (see figure 4).

However, in the past five years we’ve seen hopes of a sustained economic recovery dashed a couple of times. So, a key question for 2014 is whether the outlook for advanced economies will live up to expectations.

US: Don’t stop me now

In our view, the US outlook seems the most secure out of the major advanced economies. This is driven by two main factors: households have paid down their debt to more manageable levels (see figure 5) which has encouraged consumers to spend more; and the financial sector has restructured.

In the medium-term the outlook for the US economy remains bright. As economic growth strengthens, spare capacity will gradually diminish. This, could spark an investment spree by US cash-rich firms, which could help create more jobs in the future with positive knock-on effects on the rest of the economy. US economic output already stands 6% higher compared to Q4 2007, which is the second best performance out of the G7 (Canada has grown by around 7%).

Peripheral Europe: Still fragile

For peripheral Europe, the outlook is better than last year. In our main scenario, we project that economic growth will return to the peripheral economies in 2014. However modest headwinds remain for the business, households and financial sector.

Figure 6 shows that net trade was the only component of GDP that grew positively last year. Given the weak state of the private sector and ongoing public sector consolidation, we expect that the economy will continue to rely on foreign demand as its main source of growth.

Households in the periphery also carry a relatively high level of debt (see figure 1) and will face similar pressures where unemployment levels remain high. Unlike the US, where financial sector restructuring is largely complete and credit growth has swung into positive territory, we expect European banks to face potential capital shortfalls of around € 280 billion1 as the European Central Bank completes its Comprehensive Assessment and other regulatory measures take effect.

Core Europe: More positive outlook

For core Europe, however, the outlook is more positive. We project Germany to grow by 1.4% per annum in 2014 on the back of strong export growth. Most German businesses have strengths in key areas. On the supply side, they have access to relatively cheap credit (see our analysis in figure 2) and skilled labour. On the demand side, its world class automotive, chemicals and engineering industries are well linked into overseas growth markets, most of which are nurturing rapidly expanding middle-income classes.

Despite the uneven growth pattern across the Eurozone, the overall outlook for 2014 is much better than last year. In our main scenario – where we assume structural reforms continue unabated – we project Eurozone GDP will expand by 0.8%in 2014.

A solid recovery is also developing in the UK with an easing of the two significant headwinds to growth: high inflation and the Eurozone crisis, have eased2. We will be discussing prospects for the UK economy in much more detail in our next UK Economic Outlook which will be released in March.

1 “De-leverage take 2:  Making a virtue of necessity”, PwC  

2 ‘UK economic recovery- as good as it gets?’ PwC Economics in Business blog