The funny thing about crises is that we tend to feel as if they occur suddenly, on one day. For me, that day was when Lehman Brothers filed for bankruptcy protection on September 15, 2008. I remember looking at my Bloomberg screen and thinking I was witnessing the end of the financial markets.
A recovery, on the other hand, takes a lot of time. Yet if we had to choose one day to signal the beginning of the next chapter in our global economic life, it may be January 1, 2014. The reason? This likely will be the year that U.S. gross domestic product (GDP) rises above potential, or 2.5%, for the first time since the financial crisis. We also will see the winding down of the most aggressive fiscal intervention in modern history.
Recent economic data has been good, but in my mind the real root causes of this change are confidence, a reduction in fear and fading memories. We have been writing for years now that a key growth catalyst would be business leaders having enough confidence to start spending on something other than debt reduction and dividends to shareholders. In the Company View section, we confirm that we are finally starting to see this confidence. Companies are investing in plant, equipment and product enhancement. They are hiring too, by the way. When everyone feels a little bit more confident, the U.S. economy will accelerate to above-potential growth.
When confidence increases, fear tends to go down. For the U.S. consumer, that has meant a willingness to use low interest rates to buy a house. The Sector View this quarter focuses on our continued, and strengthening, view that the housing sector will continue to improve. This is of the utmost importance, as one of the hardest-hit areas during the crisis was construction jobs. We see real recovery here.
The U.S. is leading the way for developed countries in 2014. As you will see in the U.S. View, our call for 2014 is 3% growth (above potential and, at this moment, above consensus) and for 1.9% inflation. Our companies are telling us that consumers are resilient, housing is up and companies are investing in themselves. When you combine that with the end of some serious drag from last year’s tax increases and fiscal uncertainty, it spells growth. Inflation is still tame and we don’t expect that to change.
Globally, the recovery is underway as well. Our 2014 view for Europe calls for positive growth (1%) and low inflation (1.3%). Our base case is for positive growth for Germany, France and Italy. This has been a long time coming.
One of the biggest impediments to this global growth, especially in Europe, has been banks’ willingness to lend. Without that, chances of a sustained recovery go way down. We are finally seeing European bankers’ nightmare memories of the crisis fade. While lending has not yet shown much improvement, banks are in the early stages of stabilization, which we view as the first step toward loan growth. We cover this important issue in the Global View section.
This may well be one of the most important macroeconomic pieces my team and I will ever write. It is a major milestone for the U.S. economy to return to potential growth rates and for most of Europe to be in positive growth territory. As I remember that day in 2008, I realize that it was pessimistic and fear-based to see the end of the financial markets. That did not happen. But hey, I am the bond girl…
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The views expressed are those of the author as of January 2014. They do not necessarily reflect the views of other Janus portfolio managers or other persons in Janus' organization. These views are subject to change at any time based on market and other conditions, and Janus disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any Janus product.
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