Earlier I posted some questions for next year: Ten Economic Questions for 2014. I’ll try to add some thoughts, and maybe some predictions for each question (this one will be short).
For the last few years, “downside risks” were fairly high on my list of “questions” for the coming year. Europe has been an ongoing risk, and last year my top question was related to fiscal policy and the risks associated with the House of Representatives (with dumb policies like not cutting back on sequestration, and dumb stunts like shutting down the government).
Happily, looking forward, it seems the downside risks have diminished significantly. China remains a key risk with growth slowing and significant uncertainty around the large number of poor performing loans. That might be the #1 downside risk for 2014, although China remains opaque to outside observers – and the downside risks to the U.S. are probably small.
Europe appears to be growing again (although they haven’t resolved the core issues with the Euro), and U.S. fiscal policy is settled with the recent budget agreement. Some politicians are making noises again about not paying the bills (aka the “debt ceiling”), but I’m confident they will fold their losing hand again. Since 2014 is an election year, I don’t think Congress will do anything really stupid (like in 2011 and 2013).
There are always potential geopolitical risks (war with Iran, North Korea, or turmoil in some oil producing country). Right now those risks appear small, although it is always hard to tell. And there are always the risks of natural disasters (hurricanes, tsunamis, major meteor strikes, super volcanoes, etc). But those are low probability events and impossible to predict.
When I look around, I see few obvious downside risks for the U.S. economy in 2014. No need to borrow trouble – diminished downside risks are a reason for cheer.
Note: I’ll discuss the possibility of inflation as a risk in question #4.