THE GLOBAL MACRO FORECAST

While global growth has struggled to return to a solid pace in 2014, two new factors may have a critical impact on economic conditions in 2015. The recent drop in oil prices is clearly a stimulus for global growth, especially in developed countries. Meanwhile, the increasingly aggressive approach to monetary policy in Japan and the euro zone has a more ambiguous role to play: the ECB and BoJ’s announcement of additional stimulus measures has weighed on the price of their currency, all the more so since the Fed has put an end to its asset-buying programme. Of course, the Fed’s tolerance of an appreciation of the dollar is not without its limits ...

Emerging economies: Disappointing growth

The emerging economies once again posted disappointing growth in 2014. Despite a pick-up in growth in the developed countries (from 1.4% in 2013 to 1.8%), the emerging countries experienced a slowdown from 4.7 % in 2013 to 4.4% in 2014. The conflict in Ukraine and the sanctions taken against Russia certainly weighed on the region as a whole, but the slowdown is even more widespread: growth has stagnated in Asia (+6.5%) and lost steam in Latin America (down from 2.7% to 1.3%). The support provided by the developed regions has been more than offset by restrictive domestic policies: whether the objective is to maintain financial stability in China or, in countries such as India, Brazil and Turkey, to reduce dependence on external funding and curb inflation, authorities have sought to rein in lending. Against this backdrop, the recent drop in oil and in food commodity prices is welcome. If it continues, it will boost consumption in 2015 and could give the monetary authorities a little more leeway. On the whole, however, monetary policies in the emerging regions are not expected to support a clear acceleration in domestic demand. Their ability to accelerate growth will depend on their ability to gain export market shares

United States: Fed rate hike drawing nearer

US economic growth is gaining momentum, despite a disappointing average figure for 2014 (2.3%). End-of-year surveys confirm this momentum and tend to indicate that the trend will carry over into 2015. Thanks to extensive deleveraging in recent years, households are now in a much sounder financial position. True, the mortgage market has yet to return to normal and lending conditions are still tight (especially for first-time homebuyers), but residential investment should nevertheless continue to recover on the back of low interest rates and make a positive contribution to growth. Driven by robust job creations and the recent drop in oil prices, household consumption should prove dynamic. In turn, businesses have no reason to slow down their investments ... or their hiring. The unemployment rate should continue to fall in 2015, bringing with it the possibility of upward pressure on wages. That doesn’t mean the Fed will immediately raise its rates, however. After ending its asset-buying programme in October and preparing the markets for an initial rate hike, it can afford to be patient. The unemployment rate may have fallen to 5.8% in November, but underemployment is still significant. Furthermore, considering how high their margins are, businesses are not expected to immediately pass on pay rises in their prices. In addition, external conditions have deteriorated: the hoped-for acceleration in economic activity in the emerging regions will be modest at best, and the euro zone has a long road ahead to get out of the doldrums. Finally, and more importantly, the exceptional measures announced by the ECB since the summer and by the BoJ since late October have led to a sharp appreciation of the dollar (+7.5% in the nominal effective exchange rate since July).

Source : Thomson Datastream

Japan: The bank of Japan ramps up its support for the economy

Despite the steep depreciation of the Yen since the launch of “Abenomics”⁽¹⁾ ( -18.5% b efore t he l atest announcement) and positive inflation (2.9% in October), the Japanese economy remains fragile and has failed to gain momentum since the VAT rate hike. At the end of October, in order to prevent inflation expectations falling back to lower levels, the BoJ announced it was stepping up its asset purchases. A few days later, the government announced it was postponing the next VAT hike from October 2015 to April 2017. With this postponement, activity should pick up again in 2015, with GDP expected to increase nearly 1.5%.

Sources : Thomson Datastream

Euro Zone: Stuck in bottom gear

As the Japanese economy struggles to get out of deflation, the euro zone is struggling not to slide into deflation. After bouncing back in the second half of 2013, activity began slowing in the second quarter of 2014. Fiscal policies stopped curbing domestic demand in 2014. However the Ukrainian conflict and relatively weak activity in other emerging countries have weighed on exports. More importantly, activity has continued to stagnate in France and contract in Italy despite efforts to adjust the pace of fiscal rebalancing. Faced with persistently low inflation, the ECB decided to ramp up its stimulus measures. By first announcing the implementation of targeted LTROs, followed by the establishment of an ABS and covered bond buying programme, it has clearly opted for quantitative easing. At the meeting of the Governing Council in December, Mario Draghi also affirmed the ECB’s intention to increase its balance-sheet size by €1,000 billion... and raised the possibility of buying government debt securities. While the direct impacts of these actions appear to be modest, their mere announcement nevertheless sparked a significant depreciation in the euro. With domestic demand expected to remain lacklustre despite virtually no fiscal restriction in 2015, this support comes at the right moment. After all, private-sector spending should continue to suffer from continued household deleveraging and the adjustment of wage costs in certain countries. In 2015, growth should nevertheless accelerate just above 1%, thanks in large part to the support provided by the euro depreciation. But inflation will remain low and the euro zone vulnerable to any shock ...

Sources : Eurostat, European Commission, Candriam

⁽¹⁾Name given to the strategy adopted by Prime Minister Shinzo Abe when he returned to power in December 2012. It consists of a combination of an expansionary monetary policy, an equally expansionary short-term fiscal policy (and a commitment to rebalance the budget in the medium term) and a series of structural reforms.