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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).

Global growth in 2015: Same profile as in 2014?

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.

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.

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.

Euro zone: 2015 will be a pleasant surprise, really?

There are still major disparities as regards growth prospects in the main regions of the world. And even if the euro zone were to accelerate markedly in the short term, the underlying problems remain.

• United States: The same story, somewhat better: with deleveraging complete and an obvious competitive advantage in terms of energy costs (shale gas, unconventional oil), the US recovery continues. Corporate investment has systematically grown faster than GDP since 2010 and employment has grown at a pace of more than 200,000 jobs created per month since 2014. We can therefore consider that the US recovery is in a mid-cycle acceleration. Consumption, which also will be bolstered by oil disinflation and the upswing in credit, will probably gradually take over from investment, an engine that nevertheless will not stop straightaway given the energy advantage and the still loose monetary conditions. At a neutral fiscal policy, US growth should therefore quite easily accelerate above its potential next year.
• United Kingdom: Trees don't grow to the sky and growth is likely to slow down. Given the high prices of property and financial assets, the wealth effects will no longer be able to boost household consumption to the same extent as they have until now and, barring a noteworthy acceleration in wages - as the increase in employment is partly linked to the labour market policies the government is steadfastly conducting - the British economic situation might well have passed its peak already. In the manufacturing sector, unit labour costs have increased by 5 percentage points since 2012; competitiveness is eroding; export market shares are still declining, and the country’s reindustrialisation policy is not gaining traction.
• Japan: Abegeddon. After a 6.7% rise in GDP at an annualised rate in the first quarter, Japan has slid into a deep recession, echoing the VAT increase last April. GDP plummeted by 7.3% in the second quarter and by 1.6% in the third. Households are losing confidence again. Inflation has already fallen by one percentage point since its 3.7% peak reached in April and households now expect zero inflation at the end of the first quarter of 2015. The result has been another spectacular rise in real interest rates. However, corporate investment is very sensitive to these rates and as the capacity utilisation rate is falling as the recession drags on, we can conclude that Abenomics has failed in its attempt to jump-start the Japanese economy. The proof is that employment is contracting again in the manufacturing sector and a rise in wages, which could have sustained growth, is unattainable. In short, Japan is returning towards the deflationary equilibrium of under-employment that prevailed before Prime Minister Abe’s stimulus. The only change is that the public debt is increasingly concentrated in the central bank’s balance sheet.
• Emerging countries: From growth driver to a risk for the global economy. While emerging countries still accounted for 72% of global growth in Q2-14, they account for half of the slowdown since the fourth quarter of 2013. Emerging economies are traversing a very difficult environment at present. With the noteworthy exception of China, the end of the Fed’s bond purchases (tapering) has contributed to a currency depreciation that emerging central banks have tried to stem by raising their interest rates. Monetary conditions have therefore tightened and credit has slowed down markedly since its 2011 peak. At the same time, the slowdown and the change in the Chinese economic model are having negative repercussions on most emerging countries: direct repercussions via the trade channel as China is an important partner; indirect repercussions via the fall in the prices of the commodities that China imports which, in parallel with the depreciation of the exchange rates, is worsening the terms of trade for emerging countries. They are therefore losing competitiveness and export market share (Brazil, Russia). With lower revenues generated by external trade, fiscal policies are also less redistributive (Venezuela, Argentina, Bolivia or Ecuador). The risks of political instability in these regimes are on the rise. Several examples have marked this year: Turkey, Thailand and Venezuela, not to mention the geopolitical shocks in Russia and the new Argentine financial crisis.

However, all emerging countries should not be perceived negatively. Countries where the market economy prevails (Colombia, Chile, Peru) and which, moreover, have a real reform agenda (Mexico) remain attractive. The same goes for all those that have little exposure to US tapering, Chinese demand and the commodity cycle (MIKT, emerging Europe). Note also that Eastern Europe is likely to benefit somewhat from the ECB’s TLTROs as euro-zone banks have a significant involvement in financing in Eastern Europe.

• Euro zone: Will 2015 really be a pleasant surprise? The outlook for growth is brighter. Even if Germany abandons its role as the region’s growth driver, its outlook remains good. Admittedly, the energy choices made in Germany have a high immediate cost, especially for companies, but given the situation of full employment and exceptional financial conditions, robust growth is guaranteed next year. While the countries where reforms are lagging behind (France, Italy) will still dampen EMU growth, the peripheral countries where reforms have been undertaken will become the growth drivers next year: Spain, Greece and Portugal will provide 25% of euro-zone growth, while their economies account for only 15% of the zone as a whole. In addition to a slightly less adverse policy mix (less fiscal consolidation due to the deferral of the deficit reduction targets for France and Italy, the Juncker plan’s promise of infrastructure investment), the real improvement factors are:

1/ The credit cycle is at a positive turning point. Judging by the overall improvement in supply conditions and the rapid fall in bank interest rates for Spanish SMEs, the bank balance sheet review and the stress tests carried out by the ECB have helped remove obstacles to credit. The same thing cannot be said for the TLTROs (marginal impact in our opinion), let alone a possible QE, the effects of which on the real economy remain to be proven. The growth in credit will not be huge, but it will put an end to three years of contraction in outstanding credit in the euro zone: good news, finally.

2/ The improvement in the terms of trade is as sudden as it is historic. The combined effects of the depreciation of the euro and the fall in the oil price have led us to revise upwards our growth outlook for the euro zone by +0.4 percentage point (1.2% in 2015), mainly on the back of consumption and exports. The magnitude of the revision is greater than everywhere else. This stimulus comes just at the right moment for the anaemic euro-zone economy.

But beyond this shot in the arm, the foundations of euro-zone growth have hardly become more solid and the risk of real deflation remains tangible. Deleveraging has not been completed and no progress has been made in the political integration of the member countries. While oil disinflation is good news for real growth, it is not good news for debt ratios as the very low nominal growth rate is having a detrimental impact on tax revenues. The public debt will therefore once again increase further in 2015, while major and difficult elections are looming on the horizon (Greece and Spain). The reforms have brought about a noticeable rise in the labour market participation rate, but unemployment has increased. This means that the Beveridge curve has shifted to the right, indicating that the long-term unemployment rate has increased and, de facto, that underlying inflation will remain low for a long period (modified Phillips curve). The risk of real deflation (real interest rates being too low to return to the full employment equilibrium) in the euro zone is real. Unfortunately, an expansion - even very significant - of the ECB’s balance sheet will probably be insufficient to offset these divergences. So the first half of 2015 will be positive for the euro zone, but we emphasise this point: unless confidence returns, the improvement will remain rather short-lived.

Central banks are still hyperactive

Central banks are not only concerned about the risks of deflation, they are also aware of the risks associated with monetary policies that have remained accommodating for too long. While the exit from the ultra-accommodating monetary policies may prove to be costly in terms of market valuation, their undesirable effects on the real economy may be even worse in the long term: misallocation of resources, reckless lending practices, development of a parallel banking system, sub-optimal income distribution, risks to central bank independence, etc.

So despite the oil disinflation, the Fed is unlikely to back down this year and will start raising its monetary policy rates from June 2015. The Fed’s mandate is not limited to only inflation, the recovery is creating jobs and the output gap is in the process of closing. We believe the Bank of England will start raising its rates at a later stage (Q1-2016): given the BoE’s one-dimensional mandate and the fact that the recovery is not having an impact on wages, the situation is not comparable to that in the United States. In any case, these two candidates for normalisation must pay great attention to their communication to avoid triggering an upsurge in long-term interest rates and in yield curve volatility.

The other question is whether or not the ECB will deliver the QE that the markets expect. The ECB has a complex problem: if deflation is purely of a monetary nature, the ECB will have no other choice than to buy all types of assets so as to increase the size of its balance sheet, including sovereign bonds. If the underlying problem requires credit easing, which is what the ECB has favoured until now (purchases of ABS, bank liquidity subject to conditions), it could go for a partial QE with an extension of the purchases to other asset classes (corporates, etc.) without sovereign QE. For our part, we believe that as inflation is a monetary phenomenon in the long term, QE is therefore a logical response. And with European inflation probably bottoming out in March (-0.1%), it would be good timing. We simply warn that a cost-benefit analysis of a sovereign QE gives far from positive results. Sovereign bond buying would involve a number of hazards for the ECB: decision by the European Court of Justice on the upcoming OMTs, halt to fiscal consolidation, compliance with the treaties which prohibits direct financing of countries, possibility that the Bundesbank may not take part in the programme. Also, a QE launched now would not have much of an impact on the real economy given the very low level of interest rates, and resorting to such measures could reduce the ECB’s credibility if inflation does not pick up afterwards, which is very possible. In his 2011 study, Peersman estimated that a 2% expansion of the ECB’s balance sheet adds 0.4% production and 0.1% inflation at an 18-month horizon.[3] The ECB has revised these effects downwards since then, claiming that that a EUR 1 trillion expansion (+50% of the balance sheet!) would add between 0.2 and 0.8% inflation. Given the collapse of the credit multiplier, we believe QE would have only a marginal impact on inflation. If the ECB purchased sovereign bonds according to its capital subscription key, the German and French economies would be stimulated the most - and they are the only two countries where loans to corporates are not contracting. Moreover, investment in the euro zone currently depends more on confidence than on real interest rates, as companies’ internal financing capacity is excellent, with the exception of France and Italy.

Lastly, global liquidity will still increase at a faster pace than global GDP thanks to the ECB’s QE and the extension of the BoJ’s programme (it revised its purchase programme upwards in October). Although the Fed has stopped the expansion of its balance sheet - whose size has swollen by another USD 350 bn this year to reach USD 4,500 bn in mid-September - the global monetary base (the "liquidity" issued by all central banks worldwide) will continue to grow next year quicker than world GDP.