Five Predictions for the Global Economy in 2015
Web Posted on : Tue, 23 Dec 2014
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As 2014 comes to an end, the global economy shows signs of weakness with significant downside risks. Some of these risks are likely to materialise next year, leaving the global economy in worse shape than in 2014. We make five predictions that we expect will shape the global economic outlook for 2015 and beyond.
Looking back, our expectations for 2014 were for a moderate recovery in the world economy that would enable an orderly exit from US Quantitative Easing (QE) and a resumption of global growth to its pre-crisis levels. The reality turned out to be quite different.
The US recovery has been uneven in 2014, with negative growth in the first quarter, followed by two quarters of rapid growth. The Eurozone’s initial recovery fizzled, leaving the common currency area near recession and at risk of deflation. Japan remained stuck in deflation—notwithstanding the large expansion of the balance sheet of the Bank of Japan and the significant depreciation of the Yen—and fell again into recession in Q3. China’s growth was kept above 7.0% by a series of fiscal and monetary stimuli, but declining house prices for the last seven months have significantly weakened private consumption. Emerging Markets (EMs) continued to slow amid falling commodity prices and uneven policy responses. Growth in the Gulf Cooperation Council (GCC) and Sub-Sahara Africa (SSA) remained strong on high infrastructure spending; however, the recent sharp decline in oil prices casts a shadow on the growth momentum going forward.
What was, however, the largest surprise was the continued disinflationary pressures in the global economy. We had already warned about the risk of a Great Deflation (see our Economic Commentary on 19 October 2014). Since then, this risk seems to be materializing. Weaker-than-expected global growth has led to a further sharp fall in commodity prices. The IMF Global Commodity Index has fallen by 17.4% in the twelve months to November 2014, reflecting a 23.2% decline in in fuel prices and 5.8% decline in other commodities. These strong disinflationary pressures are likely to be the determinant factor for the global economy going forward.
Looking ahead, we make the following five predictions for the global economy in 2015:
- The US Federal Reserve (Fed) will not increase policy rates in 2015. Unlike the consensus forecast for an increase in Q2 2015, we believe that global disinflationary pressures and the continued strengthening of the US dollar are likely to lead to near zero inflation in the United States in 2015. As a result, the Fed will not have a rationale for raising interest rates as inflationary expectations will remain well below its 2% inflation target. If the Fed does raise policy rates, the effects on the global economy would be significantly worse.
- The Eurozone will enter deflation and another recession. The recent sharp decline in oil prices will push the Eurozone into deflation in 2015, notwithstanding the efforts of the European Central Bank (ECB) to avoid it at all costs. This will inevitably lead to weaker consumption and investments, thus pushing the common currency area into another recession.
- China’s growth momentum will slow amidst a strong risk of deflation. Declining house prices and lower global commodity prices will continue to weaken domestic demand and create strong disinflationary pressures. The Chinese authorities are likely to try to stimulate the economy further, but this would come on top of previous stimuli and may not be sufficient to avoid a significant growth slowdown. The slowdown is also likely to lead to near-zero inflation.
- Several oil-exporting EMs are likely to be pushed into a balance of payments crisis. The substantial decline in crude oil prices may push countries, like Russia and Venezuela, to default on its debt obligations. This may lead to contagion across other EMs, forcing international institutions to step in.
- Lower commodity prices and a weaker global economy will inevitably imply a slowdown in the strong growth momentum in the GCC and oil-exporting SSA countries. In particular, the recent decline in oil prices will force a reassessment of the ambitious infrastructure investment programmes across the two regions. The exception is likely to be Qatar, where the investment programme in preparation for the 2022 World Cup is unlikely to be delayed.
Overall, global growth in 2015 is likely to be significantly weaker than in 2014. According to the October 2014 IMF World Economic Outlook, global economic growth was projected to accelerate from 3.3% in 2014 to 3.8% in 2015. If our predictions materialise, it is more likely that the global economy will expand only by 1.5%-2.0%. As the old saying goes, “wish for the best, prepare for the worst.”