Global growth in 2015: Same profile as in 2014?

More about the Natixis Macroeconomic Outlook 2015 under the altii Content Link AL126438 or www.altii.de/AL126438.

In 2014, the global recovery stumbled over a series of unforeseen events. Bad weather paralysed the US economy in the first quarter. Seasonal and calendar anomalies contributed to the stagnation in the European economy in the second quarter. Demand in Japan - which was artificially inflated ahead of the fiscal shock - suddenly contracted in the spring in reaction to the VAT increase. Lastly, confidence deteriorated because of geopolitical shocks (Russia, Middle East).

Nevertheless, the conditions for a modest acceleration in growth in the short term remain intact. In the G4 (United States, United Kingdom, euro zone, Japan), long-term interest rates have fallen from their end-2013 level. They are at their lowest levels in the euro zone, and monetary conditions remain extremely accommodating, while they have never been this low in Japan, thanks to Abenomics. More generally, with the asset purchase programmes carried out by the main central banks, financial conditions have not been this favourable for fifteen years or so.

Chart 1:

Key figures of the macroeconomic scenario

Global GDP (Y/Y as %)

 

 

Sources: Datastream, Natixis * June 2016

At the same time, fiscal consolidation has lost momentum and fiscal policy is now only marginally restrictive in the G4. The consolidation of household and corporate balance sheets is to a large extent complete in the United States and the United Kingdom, and a new upward credit cycle has started everywhere across the G4 with the exception of the euro zone, which is lagging behind in terms of deleveraging. Nevertheless, even in Anglo-Saxon countries where it is most advanced, the credit cycle is not as buoyant as before the 2008 crisis. The still high unemployment levels, the fact that confidence has barely returned and the changes in banking regulations suggest that credit growth, albeit positive, will still remain modest next year.

The risks associated with our growth scenario for 2015 - which is a little less lacklustre - are currently balanced, while they were declining even three months ago. Among the downside risks we find geopolitical risk, sluggish demand in the large emerging countries and also the political calendar in Europe. Major elections (presidential in Greece, general elections in the United Kingdom in May and in Spain in December) in which the current government coalitions are threatened will be held next year. An overreaction by the Fed to the improvement in the US economy, by pushing up long-term interest rates, would also constitute a negative risk.

Chart 2:

G4: Outstanding credit in the economy (Y/Y as %)

G4: Debt load of households and non-financial companies 
(% of GDP)

 

 

Sources: Datastream, Natixis

Among the upside risks it is possible that the acceleration in the US economy, which is in mid-cycle, may be more pronounced than expected. Employment will be the key and the Fed’s latest Beige Book emphasises the incipient pressure on wages. The upswing in credit in the euro zone could also take place earlier than expected, judging by the improvement in lending conditions in the member countries as a whole and the rapid convergence of bank interest rates in Spain and now Italy following the AQR and stress test exercises.

The main bullish factor is obviously the historic fall in oil prices (-33% in barely six months). With the exception of 2008, this has been the sharpest fall in the oil price in the last 30 years. The shot in the arm for oil-importing economies (most countries on this planet) will therefore be significant. The IMF estimates that a 10 to 20% fall in the oil price leads to a 0.05% increase in global GDP.[1] That doesn’t sound like much, but the shock is significant when the starting point is the low growth rates we have now. If we exclude oil-exporting economies, the impact is even more pronounced. The ECB has calculated that euro-zone GDP increases by 0.2% in two years after a 10% fall in the oil price.[2] Germany, Italy and Belgium are the most favoured member countries (the impact is +0.3%). An oil shock spreads directly to the economy via consumer and producer prices. Our outlook for consumption is therefore better than three months ago. As for the supply side, energy-intensive sectors (air transport, chemicals, etc.) are obviously those that benefit the most.

When all is said and done, the global growth profile in 2015 boils down to one question: will the fall in oil prices have a positive impact on economic agents’ confidence? The income freed up by the fall in the oil price will boost consumption from the fourth quarter of 2014 until the end of the first half of 2015 in developed economies, provided that the oil price stabilises at current prices, which is our main working hypothesis. In that case, the growth stimulation will be temporary and the second half of 2015 will be characterised by a slowdown in growth, as the various economies return to their potential growth trend, which is quite low currently given the demographic prospects and the outlook for productivity. In such a scenario, the growth profile for next year would be quite similar to the disappointing profile for 2014. Nevertheless, if the income shock in H1-15 was sufficient to restore economic agents’ confidence, the investment outlook would also be improved and the growth shock could persist beyond the first half.

[1] “Commodity and Market Review” in World economic outlook, October 2013, Table 2 page 7.
[2] ECB research paper no. 113, June 2013: “Energy markets and the euro area macroeconomy

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