With Americans taking care of their health, can the Fed relax?

Download the article

In the first quarter, Americans allocated over half of the increase in consumption spending to healthcare, which represents an increase of 10% on an annualized basis compared with previous quarter. Without this acceleration, real household consumption would not have increased 3%, as published the day before yesterday, but rather a mere 1.3%; GDP would not have flat-lined but fallen 1.0%, all other variables held constant.

A detailed analysis of these numbers undoubtedly curbs the newfound optimism resulting from the announcement of a 4.6% increase in spending on services in the first quarter and the publication of an encouraging April jobs report. The Fed is not likely to be able to ignore this news.


Our 2013–2014 Scenario: A Situation Under Control

Download the article

  • Global GDP up 3.1 percent in 2013, 4.1 percent in 2014. With difficult conditions prevailing through the first half of 2013, the world economy will not grow any faster than the 3.2 percent registered in 2012. It will take until 2014 for global growth to exceed 4 percent—a level not seen since 2010. 
  • 50–50. Over the next two years, emerging economies will add $4 trillion to their combined GDP (at constant 2010 prices and exchange rates), contributing four times as much to global output as developed countries. By 2014, global GDP should therefore be evenly distributed between the emerging and developed worlds. 
  • Inflation. All quiet on this front in 2013, but will start to edge up in 2014. Weak growth and receding commodity prices in early 2013 should keep a lid on inflation throughout the year. However, more vigorous recovery in 2014 will push commodity prices up (with oil reaching $130) and accelerate inflation in emerging markets.
  • Sovereigns. Budget deficits should ease slightly in 2013; public debt will continue to swell in 2013 and 2014. Countries that have structurally weakened and whose reform policies have yet to kick in will still be at risk. Italy tops the list, followed by Spain; France is balanced on the razor’s edge; and the future of Japan will depend on how successful the new prime minister’s stimulus program is.
  • The U.S. unemployment rate will diminish to 6.5 percent in the first half of 2014. The Fed’s quantitative easing program will be over. Expectations that interest rates will revert to normal levels will bring the period of low long-term rates in the Western world to an end.
  • 10-year U.S. Treasury Note yields will hit 3.5 percent by end-2014. The rise in U.S. long-term yields will go from gradual in the latter half of 2013 to more pronounced in 2014. Europe will follow suit, with a moderate widening of the T-Bond/Bund spread.
  • The euro will trade at $1.35 in 2013. The Fed’s vastly expanded balance sheet, combined with the elimination of extreme risk in the euro area, will keep the dollar low against the euro in 2013. But the trend will reverse in 2014 when the Fed abandons its unconventional policy tools.