Bluford (Blu) Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. Ahead of the Global Financial Leadership Conference, which takes place Nov. 18-20, Mr. Putnam shares his insight about the global economy and the Federal Reserve’s quantitative easing program. He also offers a forecast for global commodities in 2014.
1. What does the forecast look like for the U.S. economy?
The U.S. is 2% real GDP economy, trying to grow a little faster, yet hindered by the government. Even so, the U.S. economy appears to have survived the government shutdown and debt ceiling debate, although concerns over these same issues could arise again early in 2014 as fiscal policy remains mired in partisan politics and brinksmanship. On the monetary policy side, the Federal Reserve seems likely to move to taper its asset purchase programs sooner rather than later. At the same time that quantitative easing is curtailed, the Fed is likely to assure markets that a near-zero target federal funds rate is here to stay for an extended period of time. There are virtually no inflation pressures to be seen. Credit growth remains relatively modest, and companies are continuing to sit on large piles of cash, in part due to the uncertain outlook for both fiscal and monetary policy.
2. What does the forecast look like for the European and Asian economies?
Europe remains stagnant, although the worst of the economic damage from the sovereign debt crisis and fiscal austerity has now past. The major constraint on growth now is the weak and under-capitalized position of the European banking system.
China appears to have weathered its growth deceleration in 2013, and for 2014 China may be headed for a year of 6.5% to 7.5% real GDP growth. New loan growth is strong, exports are rising, and there are signs that the new leadership will be increasing the pace of economic reforms over the next few years.
Japan’s experiment with massive central bank asset purchases to try to achieve a 2% inflation target and break the deflationary psychology in the country has lifted core inflation towards 1%. But there may be a big stumbling block coming after April 2014, when the national sales tax rises from 5% to 8%. We see the likelihood of artificially strong domestic consumption ahead of the sales tax rise and then declining real GDP afterwards.
3. How will the tapering of the Federal Reserve’s quantitative easing program affect the global economy? Does the tapering pose a threat to some emerging economies more than others?
The debate about tapering QE, which was ignited in May 2013 by Fed Chair Ben Bernanke already raised the Treasury 10-Year yield by about 1%. The “Taper Talk” also had the result of restoring market volatility to more typical levels from the depressed volatility when many market participants were willing to assume that the Fed asset purchases would continue indefinitely. What this means is that the major market impact has already been felt and absorbed. So, the actual decision to reduce QE probably will not bring nearly as much market reaction in U.S. bonds, or for that matter, in emerging market currencies. And the US equity market has gone for new high to new high, ignoring the whole QE debate. Indeed, there is little to no evidence that QE did anything to promote job growth — its stated objective — so it is not surprising that equity markets have not been too concerned with the removal of a stimulus program that only reduced bond yields and bond volatility and did not help the economy grow faster.
4. What is the forecast for the global commodities over the next year?
Global commodities may be a little more supported in 2014 from a better outlook in China and India. On the flip side, the lack of any inflation pressure and no special oil supply or agricultural shocks suggest volatile trading patterns with no persistent trends.