‘2014 will be a better year’

Scotiabank economist Pablo Breard refuses to be apocalyptic and expects 2014 to be better for the world economy. 


Scotiabank economist Pablo Breard says 2014 is going to be a better year than 2013. Breard does not subscribe to an apocalyptic view of the economy because, he says, it would give the United States a role in global economic structures that it no longer possesses.  

While the U.S. is the largest economy today, China will surpass it in the next five years. How the two countries will collaborate and the role they play in their respective areas of dominance in the future will have an impact on the global economy.  

“The world right now is not influenced by one single economy,” he says. 

Breard expects a development toward more multilateralism, and cited Syria as one of the recent examples. “Intervention in Syria was delayed or avoided because of the intervention of other giants in the geopolitical field, both Russia and China in a silent way.”  

He says that highlights a new world where unilateral action by one state that affects the majority of nations becomes less likely militarily, politically, economically and even in the financial markets.  

The media often focus too narrowly on one event, from Syria to the U.S. government shutdown, without taking into account the whole, he says.  

The idea of a currency war, in his view, is subject to the same constraints, he says, since a currency war is nothing other than the idea that governments play a major interventionist role in the economy. 

“Without intervention by the Chinese authorities, China will not have a stable and gradually appreciating currency as we have seen it. If they leave that to the market place, it will just be very chaotic, very volatile. Without intervention of the Federal Reserve through the asset purchase program the interest rate environment in the U.S. would be much higher than it is today, impairing the recovery of the housing market.”  

As such, the state plays a more interventionist role in global economic and financial matters than in the past, and this is no longer confined to distressed emerging markets like Venezuela or core emerging markets like China. It is has also become the norm in countries like the U.S., the U.K., Japan or Switzerland.  

“We create all this fuss about the state intervening, but at the end of the day, we are living in a more interdependent world, and have to discuss issues in a more transparent way to find a solution for the global economy.” 


The United States 

Breard is also more sanguine about the Federal Reserve’s quantitative easing, which James Rickards, author of “Currency Wars,” compares to a nuclear reactor.  

The intervention to depress long-term interest rates to support the recovery of the U.S. housing market has been successful, Breard says. 

“Without any doubt, Bernanke leaves the chairmanship of the Fed with a major achievement, which is a U.S. housing market that is in recovery mode, building activity gradually going up, housing prices recovering, and the interest rate environment that allows that to continue. Because even if there is some gradual unwinding of the monetary stimulus, the U.S. rates will remain low by historical standards but remain higher than they are today.”  

Rather than calling it tapering, it should be regarded as normalization. “What’s wrong with being normal?” he asks. “Interest rates cannot be zero, and will not be zero.” 

Breard says he is optimistic about the continuity of this structural adjustment as the U.S. banking sector is systemically sound, corporate balance sheets are healthier, households are much less leveraged than two or three years ago, and even the fiscal gap of the U.S. central government has been coming down.  

Coupled with this is the financial sector strength of the United States, which represents 34 percent of the global equity market capitalization, strong corporate governance, an improving job market and heavy investment in research intensive development and innovative technologies. “So it is hard to go against the U.S.” 

This means there is potential for U.S. households to increase tourism spending in 2014. “In that respect countries in the Caribbean like Cayman will benefit,” he says. 



Europe in turn has not undergone any substantial structural adjustment to be bullish about. However, there are countries within Europe that are doing better than others. To take this into account Scotiabank separates Europe into three groups of countries – core Europe, the Southern periphery and Eastern Europe – that need to be assessed individually.  

“There is not one Europe, there are multiple Europes. You have the core European countries connected with the Scandinavian countries, their economies are doing relatively well in the context of European stress in the periphery in the Southern countries,” Breard says. 

But even these periphery countries, with the exception of Greece, have shown that they have the governance and structural strength in place. Ireland, for instance, is showing signs of structural change that is being recognized by market participants worldwide. 

But problems persist, he says. “We have seen some new stress in Portugal’s bond market. Is that part of the differentiation that is taking place or is that really something that they are unable to meet the IMF commitments?”  

In the long term, however, even Europe’s periphery gives no reason to be gloomy. Breard points to the outstanding International Monetary Fund lending programs for Greece, Portugal and Ireland, which account for 80 percent of the total lending of the IMF.  

The past has shown that, in Latin America for instance, after the IMF intervenes, supports stabilization programs and the economies start to grow, these lending facilities are transferred to the financial markets through securitization and the issuance of bonds, he says.  

“So the Europe in distress of today will be the opportunity of European bond trading tomorrow.” 

Moreover, the crisis countries have more of a structural potential to reinvent themselves, he notes. 


Emerging markets 

Breard says he is more pragmatic than bullish on the emerging markets. In 2013, assets have shifted from emerging markets back into established, high-income countries because of a slowdown in emerging market growth, particularly in Brazil and India.  

The countries disappointed mainly because the flow of funds to these economies was driven by the exogenous factors of capital seeking higher yields amid low interest rates in the rest of the world. 

Breard concludes that emerging markets had a period of adjustment that will be followed by differentiation. “We are beginning to see growth in the core countries of the emerging markets. There are better countries than others.” 

For instance, Brazil has not yet begun its infrastructure development and is going to accelerate its fiscal stimulus. And at a base interest rate of 9.5 percent, it has only started with the tightening cycle. 

India, on the other hand, is a model of macroeconomic mismanagement – politically unstable with erratic, interventionist policies and high inflation. Meanwhile, South Korea has emerged as a stronger player in Asia Pacific than India.  

China will become the largest economy by 2017. “Whatever China does will impact the world economy. The rate of expansion has moderated, but there is nothing wrong with that as long as it is sustainable,” Breard says. “I prefer to see China grow at 7 and 6 percent over the next years, as opposed to 10 percent one year and 2 percent the next.” 

Overall emerging markets are recovering and the currencies are strengthening, he adds. 



Commodities, which in periods of stress are often regarded as a safe haven by investors, have not shown this kind of activity recently. Rather the contrary, says Breard, as gold prices have come down, indicating another sign of relief.  

Real sector commodities, like copper, in turn, experienced a downward adjustment mainly dependent on Chinese demand. “Recently copper prices have gone up, which is telling me that China is demanding more. Nobody is buying copper just to hedge.”  

Oil prices are also reflecting less stress and a lower risk of a disruptive geopolitical situation in the Middle East. “Both copper and oil are telling me there is going to be growth next year. Nobody is pricing in a disruptive, deceleration of economic activity at all,” says Breard. 

“Not everything is in distress, not everything is bad.” 


Pablo Breard and James Rickards were two of the speakers at the Cayman Investment Forum, hosted by the CFA Society Cayman on Oct. 17 at the Grand Cayman Marriott Beach Resort. The Journal interviewed Pablo Breard prior to the conference.