Emerging markets become growing concern

THE world economy should finally overcome its hangover from the global financial crisis this year as growth picks up and house prices rise, but reduced US monetary stimulus will pose a challenge.

After months of angst, investors will see how the US Federal Reserve handles its decision to curtail its policy of easy money, starting from this month.

US jobs data on Friday will give markets a sense of the pace at which the Fed plans to pare back its bond-buying programme, while minutes on Wednesday from its Dec 18 meeting will throw light on the central bank’s thinking.

“The United States will be the main focus, given the Fed has finally started to taper its asset purchases,” said James Knightley, a senior economist at ING in London, referring to what economists call the “tapering” of US stimulus.

“Nonetheless, the Fed has made it clear that it will not be looking to run down the size of its balance sheet anytime soon, while rate hikes remain some way off,” he said.

The Fed’s stimulus revived the US economy after the biggest crisis since the Great Depression and the American economy is leading the global recovery. The US could grow by up to 3% this year, helping the global economy to expand by almost 4%, according to the IMF.

The delicate job of bringing the $85bn (€62.5bn)-a-month programme gradually to an end will almost certainly fall to Janet Yellen, whose candidacy as the next Fed chair will be voted on by the US Senate today.

Ms Yellen, who would become the first woman to chair the US central bank, would take the reins on Feb 1, the day after Ben Bernanke ends his two-term stint.

For emerging markets — major beneficiaries of cheap money unleashed by Fed stimulus — a scaling back of the programme will prompt investors to reduce their holdings of stocks and bonds. Short-term economic growth could suffer due to a failure to reform during the years of easy money.

Emerging markets are becoming more of a concern for the global economy as the rich world recovers from the 2008/2009 financial crisis, while China’s slowing economy, which generates more than a third of global growth, has added to the unease.

The world’s second-largest economy releases business surveys, trade, inflation and lending figures in the week ahead. Europe offers good news for a change and US treasury secretary Jack Lew should hear some of that in a visit to Berlin, Paris and Lisbon for talks with senior officials.

The single currency area is forecast to return to growth in 2014 after two years of contraction and Greece, at the centre of the bloc’s crippling banking and debt crisis, expects its first economic expansion in six years.

Still, ECB president, Mario Draghi will be in no mood for celebrating when the bank’s Governing Council meets on Thursday. He faces the difficult task of supporting growth with limited tools in a region still facing record unemployment and high public and private debt levels.

Before the ECB meets, eurozone inflation data tomorrow will show how consumer prices are holding up despite deflationary risks in some of the weaker economies.