Economists upbeat about global growth, U.S. economy for 2014

Global growth in 2014 is expected to move up a notch or two, and there are reasons for optimism about the U.S. economy, said Standard & Poor economists on Monday.

Moreover, the economists expect the U.S. Federal Reserve to announce the first tapering of its monetary stimulus at the December policy meeting scheduled for Tuesday and Wednesday. The U.S. markets won't react too negatively to any tapering announcement, they said.

"We expect global growth in 2014 to move up a notch or two," said Paul Sheard, chief global economist and head of Global Economics and Research for the New York-based Standard & Poor's Ratings Services at the 2014 Economic Outlook briefing.

Global growth slowed down in 2013, Sheard said. The U.S. economy suffered from the so-called "fiscal cliff" and automatic spending cuts at the beginning of the year; the eurozone had a continuing recession; China saw below-8-percent growth for six quarters.

Looking forward to 2014, the three trends are expected to reverse, Sheard said.

Standard & Poor's current forecast for the U.S. gross domestic product (GDP) in 2014 is 2.6 percent, compared to 1.7 percent for 2013, said Beth Ann Bovino, U.S. chief economist at Standard & Poor's Ratings Services.

U.S. growth acceleration was supported not only by the steadily improving fundamentals but also the diminishing of the fiscal drag, according to Bovino.

For the eurozone, Sheard said the single currency bloc is coming out of recession and expected to see 1-percent growth in 2014.

Emerging markets should do reasonably well in the coming year, particularly led by emerging Asia. China's growth will remain stable, he said.

"For Japan, we expect trends of quite strong growth to continue, but it will be a bit of a test case year for 'Abenomics,'" he noted, referring to new economic policies of Prime Minister Shinzo Abe.

Sheard warned against three potential risks in 2014, namely re-surfacing of the eurozone turmoil that could stymie the recovery and trigger deleveraging or possibly a credit crunch, fiscal drag in the United States and a big pullback in investment growth in China.

Halfway through its fifth year of a painfully slow recovery, the annual U.S. growth rate averaged around 2 percent over the past four years, which is the lowest in over 50 years and certainly well below the growth rate of about 3 to 4 percent in a normal cycle, Bovino said.

"However, we are starting to see some improvements ... There are reasons for optimism that I see," she stressed. ' Senate Budget Committee Chairman Patty Murray and House Budget Committee Chairman Paul Ryan, the top lawmakers on budgetary issues in their respective chambers, unveiled a budget plan last week that would allow the federal government to avoid a looming shutdown on Jan. 15.

Bovino said the Murray-Ryan budget plan not only postpones the risk of another shutdown a few more years but also reduces some of the near-term austerity in 2014 and 2015, which gives the U.S. recovery a little bit more boost.

Bovino expects a strong private sector as the main driver for continued U.S. economic growth. "The private sector was able to absorb much of the fiscal shocks that we experienced," she said.

Moreover, single family starts finally show nice numbers. "With each single family built, that adds about two to three jobs to the economy, which is certainly good news for the U.S. recovery," she said.

Despite the fiscal shock, higher home prices, continued improvement in the manufacturing sector and consumer spending are among the reasons for her optimism toward the U.S. economy, she said.

Taking into account an average jobs growth of 195,000 per month in the world's largest economy, diminishing fiscal restraints and continued U.S. economic growth, Standard & Poor's economists expect the Fed to start trimming its massive asset purchases program in December.

Having rallied so far and so fast in this year, the U.S. stock market is due for a correction, said Sam Stovall, chief equity strategist of the S&P Capital IQ Equity Research Department.

But he also noted that "history does tell us 'good' years typically follow 'great' ones," with stocks having a greater probability and a bigger amount of increase in the subsequent year following a great year.

"I would say that the chances are pretty good that we end up with a year that is favorable, and our investment policy committee has a year-end 2014 target of 1,895 points (on the S&P 500)," he said.

"However, those good years are not without challenges," Stovall noted.

The S&P 500 has gone 26 months without a 10-percent or more decline, and what's interesting is that the number of months between such declines for the S&P 500 has averaged 18 months since World War II, with the median being 12 months, he said.

"I'm a little concerned if we do extend this period without a resetting of the dials, as what has happened in the past is that four of those six times we ended up slipping into a new bear market rather than just experiencing a correction or a decline of 10 to 20 percent," he said.

"Of course there are potential triggers or likely headwinds that could trigger this correction," he said.

"We could be looking at a peaking of the S&P 500 operating earnings, possibly a rollover of profit margins. Maybe we find out that Washington is too attached to its dysfunction to really approve the budget plan that was just agreed to in the House (of Representatives). Maybe the market reacts more to tapering than we anticipate," he said, naming a few of the likely headwinds.

"These three headwinds have been out there for quite some time, so we'll probably need something that is totally unanticipated that will throw us for this 10-plus-percent correction," he noted.

Talking about consequences of the widely-anticipated tapering from the Fed, Stovall said "a boxer is rarely failed by the punch he expects."

"The stock market won't react too negatively," he added.