Global outlook encouraging as developed economies improve, says Stewart Robertson.

April 2015

Key points

  • Upbeat outlook for the global economy aided by monetary policy easing as inflation expectations weaken.
  • US growth to recover this year after a weak first quarter, supported by robust labour market.
  • Higher levels of business investment and household spending vital to sustained recovery in the Euro zone.
  • Additional Japanese monetary stimulus may be needed.
  • Chinese set for slowest annual growth since 1990.

We expect the global recovery to become more established in 2015 as growth rates in developed economies approach their long-run averages. The US economy will likely strengthen, helping worldwide output expand by 3.0 to 3.5 per cent this year. While concerns persist about the outlook for the Euro zone and Japan, in both cases central banks look ready to act and support growth as needed.

Inflation ‘bonus’

We expect inflation to remain low this year. Last year’s collapse in oil prices will support growth in most economies, reducing costs and boosting spending power. Despite a strengthening dollar, the US Federal Reserve is likely to hike rates in the summer, with the Bank of England following suit by early 2016. However, the euro zone and Japanese central banks are more likely to loosen policy. Overall, the environment remains broadly positive for risk assets, such as equities, particularly in the developed world. Subdued inflation expectations should support bonds too.

US growth to pick up

The US economy looks to have performed disappointingly in the first quarter, hit by adverse weather. However, the Institute of Supply Management (ISM) industry surveys, which have been largely reliable indicators of key turning points in the economy, are still pointing clearly to higher output in 2015. We expect growth of close to three per cent this year when compared to 2014, helped by a buoyant labout market with the unemployment rate set to fall towards five per cent. However, with the US central bank preparing to lift rates from record lows this year, some caution is called for given uncertainty over how the economy reacts to the first hike since 2006.

Euro zone confidence boost is key

We expect the euro-zone’s economic growth rate to pick up to 1.5 per cent in 2015. The collapse in oil prices, a steep fall in the value of the euro and the European Central Bank’s long-awaited ‘quantitative easing’ (QE) has lifted business and consumer confidence. Indeed, currency weakness may prove to be the most important consequence of QE with a renewed contribution from net exports delivering a much-needed boost. But unless this improvement in confidence translates into markedly higher levels of business investment and household spending, there is a risk growth slows later this year. So, genuine question marks over the recovery’s sustainability remain. And persistent concerns Greece may exit the single-currency bloc further cloud the outlook.

Additional Japanese stimulus on cards

While we expect Japanese economic growth to resume this year, the onus is likely to fall on the central bank not only to support output but to return inflation to its two-per-cent target. Once the impact of the higher sales tax introduced last year fades, inflation is likely to drop below target and deflation may return. So, the central bank could be forced to again increase the size of its asset-purchase programme which currently stands at ¥80 trillion (£455 billion) per year. Lack of inflation illustrates the limits of QE. Further, the benefits of the weaker yen seen of late may diminish if several of Japan’s trading partners continue to experience falling inflation and weaker exchange rates.

Chinese growth to decelerate

The world is learning to deal with a new norm: a slowing Chinese economy. While output this year is likely to increase by around seven per cent, this would be the slowest rate of growth seen since 1990. But we believe this deceleration is an evolutionary process and not a cause for major concern. With the Chinese central bank having lowered interest rates and relaxed banks’ reserve requirements already in 2015, we expect growth to pick up in the second half of the year. Policymakers stand ready to ease monetary and fiscal policy if needed. Having said that, bloated levels of local government debt remain a concern.