Introduction Global Economic Outlook, Q2 2015
In recent months, the global economy has been rocked by a dramatic decline in oil prices and a dramatic increase in the value of the dollar. Diverging policies of different countries have contributed to exchange rate volatility.
In recent months, the global economy has been rocked by a dramatic decline in oil prices, a dramatic increase in the value of the dollar, a slowdown in China, uncertainty in Europe, and anticipation of a shift in US monetary policy. Moreover, there has been a sharp divergence between monetary policy in the United States and policy in other major economies, contributing to exchange rate volatility. The result is a mixture of diverging performances: The US economy appears to be on a strong growth path, driven by domestic demand but offset by weakening external demand; Europe is finally accelerating, but it faces continuing uncertainty about financial stability emanating from troubles in Greece; China is slowing, but the government is becoming more aggressive in attempting to stabilize growth; Japan is recovering, but questions remain about nonmonetary policy; India is strengthening amid investor optimism; and Brazil and Russia continue to face serious challenges.
In this edition of Deloitte’s Global Economic Outlook, our global team of economists examines the economic situation and outlook in the world’s leading markets.
We begin with Alexander Börsch’s analysis of the Eurozone economy. Alexander notes that Europe faces both positive and negative forces. On the positive side, growth appears to be reviving, largely due to lower oil prices, more aggressive monetary policy, and better credit market conditions. There is particular strength in consumer spending as opposed to exports. The countries that are rebounding nicely include Germany, Spain, Portugal, and Ireland. On the negative side, however, the troubles in Greece threaten the stability of the Eurozone. With the risk of a Greek exit remaining, Alexander notes that “financial contagion cannot be completely ruled out” if Greece was to leave.
Next, Patricia Buckley provides her outlook for the US economy. She reviews the evident strength of the United States, especially the impressive performance of the job market. She notes that strength has been consistent in terms of consumer spending and business investment, but trade performance remains questionable. Although the dollar has ascended dramatically, Patricia contends that, compared with historical experience, the dollar is not exceptionally overvalued and is not the primary culprit in the weakness of exports. Rather, she says that weak overseas demand is more to blame. Still, she expects a relatively strong performance for the US economy in 2015.
In our next article, I discuss the Chinese economy. I look at the various indicators pointing to slower economic growth and review the measures taken by the government to stabilize growth. The main focus of the government has been an easing of monetary policy. The goal has been to keep credit activity growing and prevent a meltdown in the property market. Yet, as I point out, boosting credit market activity risks exacerbating imbalances in the economy. Moreover, with excess capacity in industry and property, it is not clear that an easier monetary policy will have a sizable impact on credit demand. Rather, as the prime minister has noted, more reforms are needed.
Next, I look at the Japanese economy, which has, once again, emerged from recession. The recession was due to a badly timed tax increase, and the recovery is due to the aggressiveness of monetary policy. Yet the recovery is feeble, and investment continues to decline. On the other hand, the Japanese yen has fallen significantly, with early signs of export improvement. Wages are starting to accelerate, boding well for consumer spending. Thus the outlook is improving.
In our next article, Lester Gunnion examines the troubled Russian economy. It faces a litany of troubles, the result of declining oil prices and Western sanctions. The problems include a sharp drop in the ruble, much higher inflation, declining foreign currency reserves, weakening economic activity, and a considerable volume of external corporate debt. Meanwhile, the government is attempting to pivot toward China as a way to lessen Russia’s dependence on the West. Yet, as Lester suggests, this may not be enough to restore Russia’s economic health.
Next, Akrur Barua looks at another troubled economy: Brazil. Among the challenges have been declining commodity prices, a declining currency, high inflation, tight monetary policy, and a strong possibility of a new recession. Consumer debt remains high, thus reducing the likelihood of a consumer-driven recovery. Plus, the potential fallout from a scandal involving Petrobras could undermine the government’s ability to implement much-needed fiscal probity.
Finally, Rumki Majumdar writes about India’s vibrant economy. Indeed, it is even more vibrant than previously believed following a substantial revision of economic data. It turns out that, when market prices are used to measure economic activity, India has actually grown quite fast. Rumki examines the government’s efforts to boost the rate of growth, including the new budget plans. She concludes that these efforts are likely to be successful. Moreover, investor optimism has increased, which bodes well for business spending.