Sunday, 28 December 2014

The Outlook for Global Growth in 2015

It's that time of year to look ahead to the prospects for global growth. I posted a similar outlook a year ago and recently followed up with an assessment of those 2014 forecasts. I should be clear about why I find this exercise useful. I assemble a global growth outlook not because I have faith in forecasts. I do it because I'm looking for a "consensus view" on the year ahead, a view that is presumably already built into market prices. The consensus view, as Howard Marks of Oaktree Capital recently reminded us, is "what 'everyone knows' [and] is usually unhelpful at best and wrong at worst". What will move markets in 2015 is not the current consensus forecast, but the ways in which actual growth diverges from that consensus.

With the foregoing caveat in mind, there are four things to know about the outlook for global growth:

  • 2015 growth forecasts have edged down over the past year;
  • 2015 growth is currently expected to be better than 2014; 
  • Most DM economies are expected to grow above trend, while most EM economies are expected to grow below trend;
  • Leading indicators suggest somewhat slower growth than forecast for most countries.

2015 Forecasts have Edged Down

Last year at this time, global growth was expected by the IMF to pick up to 3.8% in 2014 while JP Morgan economists expected a more modest acceleration to 3.3%. Instead, 2014 growth is now estimated to have remained flat at the same disappointing 3.0% pace as in 2013.

The focus of economists now is on growth forecast for the year ahead, but it is worth noting that views on 2015 growth have edged down over the past year. 

This year, forecasters tell us once again that global growth will pick up in 2015 to 3.8% (IMF October forecast), or to 3.5% (Barclays December forecast), or to 3.3% (JPMorgan December forecast). These forecasts are presented as upbeat news, but the reality is that the 2015 forecast for has faded from the 4.0% forecast published by the IMF in July 2014.

2015 growth expected to be stronger almost everywhere

As was the case last year,  growth is expected to pick up in most countries in 2015. Economies with the largest forecast growth pickup include Japan (1.4% in 2015 vs 0.2% in 2014), Mexico (3.2% vs 2.2%), Eurozone (1.6% vs 0.9%), US (3.0% vs 2.3%) and India (6.0% vs 5.3%). Modest growth improvements are also expected in Australia and Korea. In Canada, 2015 growth is expected to match the 2014 pace of 2.4%.

Growth is expected to slow in UK (2.8% vs 3.0%) and China (7.2% vs 7.4%), while Russia is expected to fall into recession (-3.3% vs +0.6%).

Once again: DM above trend, EM below trend

While global growth is expected to be a bit stronger in 2015, the divergence between DM and EM growth performance is expected to continue. EM growth is consistently higher than DM growth, but the important divergence is that DM economies are expected to grow above their trend (or potential) rate of growth, while EM economies are expected to grow below their trend rate. In the chart below, the blue bars show the 2015 growth forecast versus the OECD estimate of the trend growth rate for each economy.

In 2015, the larger DM economies are expected to grow at an above trend pace, while Australia is expected to grow at trend. In contrast, all of the major EM economies, except Mexico (0.3% above trend), are expected to grow well below trend, especially Brazil (3.0% below trend) and Russia in recession (6.5% below trend, off the chart). 

Leading indicators support most growth forecasts

In the chart above, the red bars show the latest OECD composite leading indicators (CLIs) versus trend for each of the economies. These CLIs generally support weaker 2015 growth than economists are forecasting, with a few exceptions.

In the DM economies, the leading indicators suggest that growth could surprise on the downside in US, Japan and Canada.

In the EM economies, CLIs suggest that growth could be weaker than expected in China and Mexico, but stronger than expected, although still below trend, in India, Brazil and Russia. Korea is an exception, where the CLI suggests strong above-trend growth.

Conclusions and Questions

2014 turned out to be a year in which global growth was modestly disappointing, but the real story for markets was the divergences in real GDP growth. Will the divergences of 2014 continue? If so, the US Fed and the Bank of England will likely begin to tighten monetary policy in 2015, while the ECB, BoJ and PBoC will likely maintain their current accommodative policies or ease further. In such a scenario, the US$ is likely to continue to appreciate against most of the world's currencies. An appreciating US dollar combined with below trend growth in China and other EM economies is negative for commodity prices and for commodity exporting countries and their currencies. 

The questions one should ask about 2015 forecasts are these: 

  • Can the macro divergences in the global economy be sustained without creating serious financial instability and in some countries and significant volatility in global currency and financial markets? 
  • Can the low growth, highly-indebted Eurozone economies and Japan sustain stronger growth with super-accommodative monetary policy but without major economic reforms? 
  • Can China navigate a soft landing of its over-leveraged economy?  
  • Can Canada and Australia, with overheated housing markets, continue to grow at or above trend after a sharp fall in commodity prices and as the Fed begins to raise its policy rate? 
  • Will we look back on 2015 as yet another year that started with optimistic forecasts and ended with disappointment? 

My tentative answers to these questions are: No, No, Don't Know, Unlikely, and Probably. As was the case last year, I suggest that investors should stay on their toes.

Ted Carmichael is Founding Partner of Ted Carmichael Global Macro. Previously, he held positions as Chief Canadian Economist with JP Morgan Canada and Managing Director, Global Macro Portfolio, OMERS Capital Markets. 

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