Sustained Global Economic Expansion Expected Despite China Concerns and Emerging Market Turmoil, Says BNY Mellon's Richard Hoey

London and New York - 28 February 2014

Orderly Deceleration of Chinese Economic Growth Anticipated; U.S. GDP Growth at 3% in 2014, 2015 and 2016 

Despite recent concerns about financial risks in China and stresses in some other emerging countries, stronger global economic growth is expected in 2014, according to BNY Mellon Chief Economist Richard Hoey in his most recent Economic Update.  Global GDP growth should accelerate by one-half to three-quarters of one percent faster than in 2012 and 2013.  For the U.S., Hoey continues to expect three years of 3% growth in 2014, 2015 and 2016.

"We believe that the Chinese government has the financial strength to absorb a substantial portion of the legacy bad debts over a period of years and to tolerate a gradual recognition of legacy bad debts in the private sector over an extended period of time.  The result should be an orderly deceleration of Chinese economic growth," Hoey says.  Hoey expects about 7.5% real GDP growth in China this year. 

"After running current account surpluses for many years, the external balance sheet of China is quite strong," Hoey continues. "It is a net international creditor, not a net international debtor.  Chinese debt is largely owed to domestic Chinese lenders in an economy with a very high savings rate.  The government of China has the power to decide who will absorb the losses from bad debts in vulnerable portions of the Chinese financial system and when that will occur."

Hoey discusses that many emerging countries are sensitive to the Chinese business cycle, which has had a different pattern than the developed country business cycle.  According to Hoey, "The Chinese business cycle is out of step with the developed economy business cycle due largely to the hangover from the credit boom engineered by China after the global recession to mitigate the spillover to China from the global recession."

Other Economic Update findings include:

  • WELL-BEHAVED PATTERN FOR OIL PRICES AND OTHER ENERGY PRICES – Because spending on energy is such a large portion of global spending, Hoey believes that energy prices are also "causal" for economic growth.  Weak or roughly flat world energy prices, especially when they are due to strong supply growth more than to cyclical weakness in demand, can help support global economic expansion. 


  • MONETARY POLICY EXPECTATIONS IN MAJOR COUNTRIES ARE UNCHANGED – Hoey expects that quantitative easing will continue to be tapered at $10 billion per meeting, with a high "hurdle" for any decision to pause the taper.  Hoey expects that short-term interest rates should start to rise in the second half of 2015 and additional easing from the Bank of Japan is likely to be needed later this year.  Hoey also expects a slight easing move from the ECB soon. 


  • U.S. IN MILD INVENTORY SLOWDOWN – Hoey believes that there are two different kinds of inventory adjustment.  One occurs when final demand drops sharply and businesses are slow to adjust production, generating substantial cyclical weakness.  A milder version is when the pace of inventory accumulation surges powerfully and then slows to a more sustainable pace.  Hoey believes that the U.S. economy is undergoing the latter, milder inventory slowdown. 

"While the fourth quarter 2013 real GDP growth should be revised downward and the first quarter 2014 growth rate may be weak, we continue to expect real GDP growth in the U.S. of about 3% in 2014, continuing at roughly the same pace in 2015 and 2016," Hoey concludes. 

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