It looks like the economy might actually recover in 2014. But will it?

November 12, 2013

Source: OECD

There has been a common thread in mainstream economic forecasting lately. It goes like this: "Yes, 2013 has been rough. But growth should pick up in 2014." The latest example is from the OECD, the organization of leading developed nations that on Tuesday projected improvement just around the corner, as its index of leading indicators rose.

The same story shows up in almost any mainstream forecasters' estimates. For example, in their last official forecasts, top Federal Reserve  concluded that 2013 U.S. economic growth was on track to be only 2 to 2.3 percent. But they forecast that would rise to the 3 percent ballpark in 2014 and as high as 3.5 percent in 2015.

The consistent pattern for the last four years has been to project improving growth in the year ahead, and then to mark down those projections when the rosier future does not arrive. See this chart, for example, which my colleague Ylan Mui wrote about in the spring:

Source: Regions Bank
Source: Regions Bank

None of this is to pick on the OECD or the Fed. Anybody who has been in the business of trying to predict the economic future the last few years has had a hard job, from the Congressional Budget Office to the IMF to a panoply of private forecasters.

But the persistence of this trend raises a more important question: Is this an economy that is on track to finally get back to normal, but which keeps hitting pockets of bad luck? Or is there something more fundamentally broken that is the reason forecasters keep proving overly optimistic year after year.

Here's the case for the "unlucky" case. Each year we have seen one economic force or another emerge that has held back growth prospects. There was the eurozone crisis in 2010 and 2011 and ensuing recession. There was U.S. fiscal pullback, in state and local governments in those two years and increasingly a federal government tightening in 2012 and 2013. Throughout it all, there has been damaging brinksmanship by fiscal authorities on both sides of the Atlantic. And growth in emerging markets, including China, has started to reach the end of its period of extraordinary growth and is settling into a longer-term pattern of merely "pretty good."

Add all those up and you have a recipe for disappointment.

At the same time, to simply chalk up the disappointing results, year after year, as bad luck misses something more fundamental. First, some of these headwinds have been forseeable. Fiscal austerity in Europe and the United States did not arrive overnight; the shift toward lower deficits has been in train since 2010.  The slowdown in emerging market growth was inevitable, even if it is arriving a little sooner than forecasters had expected.

So the question is whether the latest round of forecasts, for stronger growth in 2014, are based on something more thoughtful than just a hope that eventually the headwinds will end and the U.S. and global economies can start cranking a little faster.

The good news for 2014 is that those headwinds--the ones we know about--are already priced in. U.S. government spending cuts and tax hikes took place, but there aren't likely to be additional ones next year. Emerging markets continue on their moderate growth path, but there doesn't seem to be a collapse in activity. Europe's problems may have finally bottomed out, and its sense of acute crisis has long passed.

In other words, the forseeable things that dragged down growth the last few years look unlikely to recur. So the good news is that the natural resilience of the world's leading economies should have a greater ability to assert itself, driving the kind of expansion embedded in projections from the IMF, the Fed, and presaged by the new OECD numbers.

A more full-throated recovery has to happen eventually. And so why not 2014?

The counterweight is this: We don't know what we don't know. The old headwinds have been dissipating. But we have no ideas what new ones could arise in their place. An oil price shock? Premature tightening by the leading central banks?

The biggest lesson of the last six years of crisis and weak recovery is this: Just because a pickup looks like it is right around the corner doesn't mean it will actually arrive.

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Ezra Klein · November 12, 2013