Introduction Global Economic Outlook, Q1 2015

As the new year begins, there are a handful of trends that are driving the global economy.

Global Economic Outlook, Q1 2015

As the new year begins, there are a handful of trends that are driving the global economy.

  • First, the sharp drop in the price of oil is changing the economic landscape. Driven by weak demand and a big increase in output in the United States and elsewhere, this has boosted consumer purchasing power in oil-consuming countries, suppressed inflation in developed economies, pushed up the value of the US dollar, and weakened several oil-producing economies.
  • Second, the shift in US monetary policy during the past year and the expected increase in short-term US interest rates later this year are influencing currency values around the world, especially in emerging markets. The necessity of maintaining high interest rates in order to prevent severe currency depreciation has led to much slower growth in many emerging markets.
  • Third, weaker growth and low inflation in the Eurozone, Japan, and China are offsetting the positive global impact of a rebound in the US economy. In Europe, Japan, and China, a more aggressive monetary policy is the principal tool used by governments in attempting to revive growth. Yet in all three locations, a consensus has developed that greater structural reforms will be needed if sustained growth is to be attained.

In this report, our economists from around the world examine the current and expected economic situation. First, Alexander Börsch examines the repetitive troubles of Europe’s economy. He points to very weak investment as the principal problem in Europe. Alexander notes that weak investment not only limits short-term growth, but also reduces the long-term potential of the economy. And while the ECB has attempted to stimulate credit market activity, Alexander points out that credit availability is not what is holding back business investment. After all, companies are laden with cash. On the other hand, he points to survey results that may bode well for a revival of investment in 2015.

Second, Patricia Buckley looks at the US economy. She notes that there is considerable strength of business investment and private sector hiring, both indicating a relatively high degree of confidence. Expected areas of slow growth going forward are exports and government spending. Moreover, housing remains a puzzle. In her article, Patricia provides an in-depth analysis of the factors driving the US housing market and the reasons to expect a pickup in activity.

In our third article, I provide an analysis of the Chinese economy. I discuss the fact that China continues to struggle with a tough balancing act, attempting to avert a further decline in growth while not allowing the imbalances in the financial system to become overwhelming. At the same time, I note that China is making small but significant moves in the direction of reform. After noting a range of data indicating slower growth, I discuss the recent decision by the central bank to cut interest rates. I also discuss the government’s plans to liberalize financial services by first introducing deposit insurance.

Our fourth article looks at the British economy. Ian Stewart writes that, although the British economy continues to outperform most other developed markets, there remain some clouds on the horizon. These include weak wage growth, troubles in the Eurozone, and signs of slowdown in the housing market. On the other hand, the British economy continues to benefit from lower commodity prices and low inflation, which provide the Bank of England with more wiggle room.

Next, I examine the fast-changing situation in Japan. The economy has reentered recession following the big tax increase that took place in April. I highlight the economic impact of the tax increase and then examine the new policy choices. These include acceleration of quantitative easing by the Bank of Japan as well as a decision by the government to postpone the next round of tax increases.

In our sixth article, Lester Gunnion examines the Russian economy. He provides details about the troubles afflicting Russia, including the declining price of oil, severe downward pressure on the ruble, high inflation, accelerating capital flight, and high interest rates. He discusses the impact of this on growth, fiscal balances, and the limited policy options that Russia has at its disposal.

Next, Rumki Majumdar provides her analysis of India’s economy. She looks at how, through some early steps, the new government has laid the groundwork for substantial reforms. In addition, she discusses how the Indian economy has begun to show some early signs of strength. On the other hand, business investment has not yet responded to the new policy environment or to the fact that measures of confidence have risen. She notes that a combination of tight monetary policy and falling oil prices have helped bring down inflation, thus setting the stage for an eventual loosening of monetary policy.

Finally, Akrur Barua looks at the Brazilian economy. He discusses the challenges faced by the new economics team appointed by President Dilma Rousseff and what kinds of policy initiatives they may undertake. He notes that their job is made that much more difficult by the downward pressure on the currency. This emanates from expectations of a rise in US short-term interest rates. The result is that Brazil’s borrowing costs will probably remain high, thus hurting business investment as well as consumer finances.