It has been six years since the financial crisis that brought the world economy to a standstill. Soon afterwards, policy makers and analysts began to outline the main features of the recovery. Virtually all these observers agreed that by 2015 the global economy would be back on track and growing robustly. As the world is poised to enter 2015, the world economy is strengthening but risks remain notable, while Euromonitor’s forecasts leave no doubt that a rebound is taking longer than expected.
Outlook for major economies
Euromonitor’s preliminary estimates predict that the global economy will strengthen in 2015 with real GDP growth of 3.7% up from 3.2% in 2014, marking the strongest growth since 2011. Yet results across economies will be highly uneven and in some cases well below historical trends. The disparity in performance means that 2015 will be another year of modest growth for many parts of the world. Geopolitical tensions, risks of a wider Ebola outbreak, and a bigger slowdown in the eurozone or China remain key challenges. The global economy will see progress led by the USA, but the drags on growth are proving too durable to be rectified in the near term:
- The outlook for the US economy is crucial with real GDP set to rise by 3.3% in 2015 – a pace roughly matching historical trends. Consumer debt is being steadily scaled back while business investment is set to rise if “policy uncertainties” do not spike. The greatest risk is that political brinkmanship could stymie key public programmes or temporarily shut the US government down;
- India will drive growth in Asia Pacific but China and Japan will be laggards. China’s real economic growth will slip to 7.1% in 2015, marking the fifth consecutive year of stagnant or decelerating growth as Beijing continues to move from an investment- and export-led economy to one driven by consumer demand. Though relatively high, China’s rate of growth will be well below the country’s historical trend;
- Japan’s economy is forecast to grow by 0.3% in 2015 as the economy slipped back into recession in Q3 2014. Tokyo’s overriding policy focus (known as Abenomics after its Prime Minister) is to reflate prices. If Abenomics is successful, Japan’s long-term prospects should improve but the near term impact on the economy will be minimal;
- Latin America’s prospects for 2015 are disappointing with Brazil among the weakest performers. Real economic growth of 1.1% is owing to waning competiveness, a slump in private investment and tighter controls on public spending;
- The outlook for Russia will weigh down on Eastern Europe’s prospects in 2015. Deepening geopolitical tensions and related sanctions have seriously weakened Russia’s economy, resulting in contracting investment, declining real income and large capital outflows. Russia’s economy will contract by 1.0% in real terms in 2015 after gains of 0.5% in 2014. This will have spillover effects for other CIS countries as their remittances and exports see a sharp decline;
- The eurozone’s performance will pose a major risk to the global economy in 2015. After several years of negligible growth, real GDP will rise by a meagre 1.1% in 2015. Fiscal pressures, though easing, will continue. The painful process of structural adjustment also has several years to go as peripheral countries struggle to bolster their competitive position relative to Europe’s leading economies. Meanwhile, inflation in the eurozone has recently fallen to near-zero levels, threatening to pull growth rates down even further. Euromonitor forecasts inflation of just 0.6% for the bloc in 2015. So far, European leaders have been unable to reach a consensus on how the central bank should react. Euromonitor’s forecasts show that the region’s three largest economies, Germany, France and Italy have very modest prospects. Germany can expect real GDP to rise by 1.2% in 2015, below the historical trend. In France, growth of 0.8% is predicted after an expected 0.4% in 2014. In Italy, growth of 0.3% is projected following three consecutive years of contraction.
Real GDP Growth in World, Eurozone and USA: 2009-2015
Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), World Economic Outlook (WEO)
Note: 2014 and 2015 are forecasts based on preliminary estimates
1. Pro-Growth trends in the global economy in 2015
A pickup in economic performance is expected in 2015 but growth will be below historical trends. Nonetheless, several trends can be singled out that will provide at least some support to the recovery:
A modest firming of global trade
Traditionally, world trade has grown at roughly double the pace of the global economy. That has not been the case in recent years. Analysts have blamed the slowdown on economic malaise in the EU or the hesitant pace of trade liberalisation. Recent research, however, indicates that the slowdown is largely structural in character. The World Trade Organization (WTO) has scaled back its forecasts but predicts that global trade will grow by 4.0% in 2015. This will provide a boost to the global economy, though trade will not be such a crucial driver as in the past.
The sharp drop in oil prices
Oil prices have fallen more than 40% in the second half of 2014 and by year-end stood at the lowest level in more than five years. The sluggish performance of the world economy is one reason for the sudden glut but more important is the rapid development of the shale oil industry (particularly in the USA) resulting in an excess of supply over demand. Led by Saudi Arabia, the Organisation of Petroleum Exporting Countries (OPEC) has responded by maintaining existing levels of output and allowing oil prices to decline. OPEC’s goal is to drive high-cost producers – primarily the newcomers supplying shale oil – out of business.
OPEC’s strategy will hurt oil producers like Venezuela, Nigeria and Russia that have few non-oil sources of foreign exchange but it will benefit oil importers such as South Korea, Japan, China and large parts of the eurozone. The windfall enjoyed by consumers in the latter countries is likely to be spent rather than saved, boosting their economies as well as the confidence of both consumers and investors. Euromonitor forecasts the Europe Brent spot oil price will average US$82.0 per barrel in 2015 down from US$99.9 in 2014.
Global Oil Prices: January 2014 – December 2015
Source: U.S. Energy Information Administration
Note: Data is not seasonally adjusted. Data from November 2014 is forecast.
Progress in consumer deleveraging
Household deleveraging has been an important drag on the recovery in developed countries – especially in those that experienced a housing bubble. During the Great Recession, the ratio of debt-to-income rose sharply when property values fell and large numbers of workers lost their jobs. The balance sheet adjustment in the household sector is a common post-recession feature although the current process is particularly slow owing to the exceptionally high levels of debt accumulated and the very gradual upward shift in future income expectations. Household debt is nonetheless being scaled back and consumers are cautiously returning to markets as credit restraints ease. In the USA, for example, consumer lending was 125% of total annual disposable income in 2007 but this dropped to 101% in 2013.
2. Global growth constraints in the global economy in 2015
Despite trends that are favourable for global economic prospects, there are other conditions, also common to many countries that act as drags on the world economy:
A legacy of high debt
Many countries saw levels of debt soar in the aftermath of the Great Recession. Some were forced to bail out the banking sector while others rushed to launch stimulus programmes in the hope of spurring a recovery. In many instances, the household sector had accumulated substantial debt prior to the collapse of property markets in 2009. Households and consumers are deleveraging but they still grapple with uncomfortably high levels of debt.
A great many debt-laden countries lack the fiscal flexibility to address their problems. They can ill afford to boost demand or private investment by cutting taxes. Nor can they undertake stimulus programmes or increase public spending to improve infrastructure. Faced with these constraints, the economic prospects of many countries are weaker than they might have been. In the eurozone, Greece and Italy are two of the more extreme examples of debt-laden countries. Greece’s public debt is an estimated 177% of GDP in 2014 while that of Italy stands at 132%.
A jobless recovery in the near term
According to the International Labour Organization (ILO), growth of world employment slowed perceptibly after the Great Recession and there is little chance that it will return to the pre-crisis trend in the foreseeable future. In fact, the global jobless rate actually rose in 2014 and the ILO expects a further increase in 2015. Such a large pool of unemployed will slow the pace of any economic rebound:
- Persistently high unemployment carries substantial fiscal costs. These include higher levels of unemployment benefits and welfare payments as well as an increase in the number of early retirements. This increased spending pushes up a country’s public debt. Within the eurozone, Euromonitor forecasts that Greece and Spain will continue to have the highest unemployment rates in 2015 at 24.8% and 23.7% respectively;
- A large pool of unemployed generally adds to the size of the informal sector. Both wages and productivity are much lower than in the formal sector while the loss of government revenues associated with informality adds to fiscal problems;
- Unemployment afflicts young workers disproportionally. In 2015, ILO predicts that global youth unemployment will stand at 12.7% and it could rise slightly in the medium term. The economic and social costs of youth unemployment include a “discouraged worker” effect, the lack of on-the-job training and long periods of depressed earnings. Equally important, the phenomenon can have serious political consequences. The failure to deal with persistent youth unemployment means more disaffected workers will turn to violence, adding to existing conflicts in the Middle East and certain parts of Africa and Asia.