Many commentators, but by no means all, have become increasingly optimistic that 2015 will be the year that the global economy will at last begin to expand at a faster, more sustainable pace, led by the developed economies. The recovery process has taken far longer to become established and for very good reasons. Following government and central bank supported initial rebounds in growth, the 2011 to 2013 period was plagued by all manner of events from natural disasters to the euro crisis and fiscal retrenchment.
It was also accompanied by policy mistakes and still high levels of debt but, by 2014, the ongoing support from central banks had generated growing business and consumer confidence and indeed, stronger growth in most countries. Unfortunately, from the perspective of the world aggregate, this is coinciding with China’s economic rebalancing and downturns in Russia and Brazil, slowing emerging market headline growth.
Despite the prospect of a period of temporary negative inflation due to the collapse in oil prices, most major central banks believe underlying growth dynamics are much improved and both the Fed and the Bank of England are keen to begin raising interest rates this year. European economic data is also surprising positively while the Bank of England is now specifically targeting 2% growth, with both benefiting from sizeable currency declines.
Naturally enough, there are still many sceptics, but both governments and central banks have effected significant improvements in recent years. Non-government balance sheets have been repaired, housing over-investment has eventually been followed by rising house prices – even in Spain, the banking system has probably never been better capitalised, fiscal austerity has run its course, interest rates and bond yields are at record lows, loan growth is picking up, wages are starting to accelerate, the ECB has at last introduced QE, the Chinese authorities are easing and the oil price is some 50% lower than six months ago.
Unfortunately, what hasn’t improved is the level of aggregate debt but, in general, it has shifted from the private sector balance sheet to that of governments. Of course, experience has spawned cynicism of economic forecasts but, you never know, this could be a year for upward revisions.
In summary, global GDP growth is projected to grow at a somewhat faster rate in 2015 than it has in recent years led by a resurgence in developed markets. Firstly, extraordinary factors that held back growth in 2014 are unlikely to be repeated; for example weather impacted decline in US growth and the Q2/Q3 recession in Japan, secondly, the benefits of the much lower energy prices should exceed the detrimental impact on those countries negatively affected, thirdly, the past and current sustained monetary stimulus will contribute to growth overall and fourthly, both business and consumer confidence is rising.
The outlook is not without risks, of course, especially in emerging markets where the pattern of growth is likely to be uneven while deflation and geopolitical concerns persist. Given central bank policy, however, higher inflation should return but not for several quarters, while resolutions to events in Greece and the Ukraine are in the interests of all parties.
