Global Macro View – Ten Big Questions for 2015

by: Nick Kounis , Aline Schuiling , Maritza Cabezas , Arjen van Dijkhuizen

Global-Macro-View - 2014Q4 - Ten Big Questions for 2015.pdf ()
  • Global growth to strengthen: There is no shortage of big macro questions dominating the outlook for the economy and financial markets. We provide our view on what we see as the ‘Big Ten’. The focus is mainly on 2015, but we also provide some early thoughts on 2016, as we have extended our forecasting horizon. We think global economic growth and world trade will step up a gear going forward. The US economy is building substantial momentum. Private sector balance sheets have strengthened noticeably, laying the foundation for households to spend and companies to invest and hire. It is more likely that the US will pull the laggard economies up, rather than that they pull the US down. Emerging market exports are highly correlated to advanced economy demand. In addition, the world economy will benefit from the fall in commodity prices.
  • Policymakers taking action to sustain growth: Finally, policymakers in economies that face challenges are reacting. ECB President Draghi has been at the heart of efforts to revive the eurozone economy and we think these efforts are about to pay off. The most visible sign of this is the fall in the euro. Crucially, banks are easing their lending standards, having gone a long way to re-capitalise. Furthermore, the ECB is likely to further expand its asset purchases. A slow recovery is on the cards in the eurozone. Policymakers are also on the move in Asia. The BoJ has embarked on what surely is the most aggressive monetary easing programme in history. Meanwhile, the Chinese authorities have so far succeeded in managing a gradual slowdown in the economy, and we expect them to continue to sustain growth at lower – but still impressive – rates.
  •  Chances of bad deflation generally slim:  There is no shortage of risks, there never is. From deflation, European political risks and a hard landing in China, to instability caused by US rate increases and geopolitics. In addition, long-term growth has slowed in the world’s biggest economies. We think the chances of bad corrosive deflation are rather low in most economies. Global inflation is falling, but that is due to sharp declines in commodity prices. The eurozone and Japan are the economies most at risk of bad deflation, but sharply lower currencies and improving labour markets should contain these risks. Political risks in Europe relate to elections in Spain, Greece and the UK.
  •  The Fed’s exit: We expect the Fed to start to raise interest rates from the middle of next year. The risk is that interest rate increases destabilise financial markets and hurt confidence. However, lessons from history provide some comfort. Past rate hike cycles suggest the economy and growth-related assets continue to do well. We do not think this time will be different. With inflation subdued, the Fed will be able to withdraw stimulus at a pace that the economy can cope with. The policy divergence with other major central banks should continue to push up the dollar. Government bond yields will rise moderately in the US, but remain relatively subdued elsewhere.