RSM Global

World Economic Outlook 2015

Economic Growth Trends

The world economy is set to continue its slow recovery in the new year. The World Bank predicts global GDP growth will increase from 2.6 percent in 2014 to 3.0 percent in 2015. From 1.8 percent in 2014, the developed economies are projected to reach 2.2 percent GDP growth in 2015. Sustaining their growth differential over the advanced industrialised countries, developing and emerging economies are forecast to grow by 4.8 percent in 2015.

Growth forecasts for the new year indicate major variations within these economic groups:

United States

The United States has emerged as the growth leader of the developed country group with a projected GDP expansion of 3.2 percent. Recent developments in the U.S. labour market indicate that the American economy is finally accelerating from the jobless recovery that characterised the early post-recession years. The U.S. Department of Labor reports that the American economy created 252,000 jobs in December 2014 (the best performance since 1999), lowering the unemployment rate to 5.6 percent.

But two indicators signal caution about the U.S. economic recovery: (1) wage growth in the United States remains tepid, hindering the rebound of American households from the 2008-09 crisis; and (2) labour force participation in the U.S. has fallen to 63 percent, the lowest level since the late 1970s – demonstrating that many discouraged American workers displaced by the Great Recession have exited the labour force.

United Kingdom

The United Kingdom is projected to grow by 2.9 percent in 2015, over double the anticipated growth rate of the Euro area. Against a Eurozone jobless rate of 11.5 percent, the U.K. registers an unemployment rate of 6.0 percent. Increasing household spending, rising housing prices, and expanding business investment provide grounds for optimism about the U.K. economy in 2015. The trajectory of the British economy in the new year validates claims by David Cameron’s Government (facing a national election in May) that its much-maligned policy of fiscal consolidation is now bearing fruit.

The U.K.’s economic growth differential over the continental European countries illustrates (1) the country’s standing outside the Eurozone, which partially insulates the U.K. from ongoing concerns about the future of the common currency; (2) a more accommodating monetary policy than the one pursued by the European Central Bank; and (3) a more diversified structure of foreign trade than continental Europe, with a larger share of British exports destined for faster-growing non-EU markets like the United States.

Euro area

Economic growth in the Eurozone is projected to reach 1.1 percent in 2015. This is an advance over 2014 (when growth reached 0.8 percent) and 2012-13 (when the euro area suffered a double dip recession). The World Bank forecasts continued improvement in 2016 with growth of 1.6 percent. But, economic growth in the Eurozone remains weak, signaling persistent lags in job creation vis-á-vis the Anglo-American countries and exerting a continuing drag on the world economy.

Country-specific trends in the euro area provide additional cause for pessimism. The five largest Euro member states face weak growth in 2015: Italy 0.4 percent, France 0.9 percent, Germany 1.2 percent, Netherlands 1.2 percent, Spain 1.8 percent. The fastest growing economies in the Eurozone are Estonia (2.9 percent) and Lithuania (which joined the Euro on 1 January 2015 and is also forecast to grow 2.9 percent in the New Year).

Three factors may boost short-term economic growth in the Euro area: (1) the anticipated launch of a quantitative easing programme whereby the ECB (unburdened by worries over inflation which has fallen below the targeted 2 percent) would purchase large amounts of government bonds; (2) the recent depreciation of the Euro, which heightens the competitiveness of Eurozone exports; and (3) the dramatic fall in petroleum prices, which lowers energy costs for households and businesses in Euro member states that depend on imported oil.

But the Eurozone’s long-term growth prospects remain guarded. This slow growth trajectory reflects the high levels of public/private debt that persist in many member countries despite recent austerity measures. It also illustrates lagging productivity in the euro area (critical for high-cost economies facing strong competition from China and other emerging markets) amid weak investment in infrastructure and technology, high structural unemployment, and adverse demographic trends.

Japan

GDP growth in Japan is projected to increase from 0.2 percent in 2014 to 1.2 percent in 2015, rising to 1.6 percent in 2016. Fulfillment of this modest GDP growth forecast hinges on implementation of Prime Minister ShinzōAbe’s economic reform programme that includes corporate tax cuts, expanded labour market opportunities for women and foreigners, and fiscal/monetary expansion to extricate Japan from its deflationary spiral.

 

Emerging Markets

The World Bank forecasts a continuation of the steady deceleration of the Chinese economy. From 10.1 percent in 2010, GDP growth in China is projected to reach 7.1 percent in 2015. China’s economic slowdown results from a combination of external factors (notably weak export demand in the European Union, China’s foremost trading partner) and internal developments (including measures by the Chinese government to unwind excess capacity in key industries and dampen credit growth in the country’s real estate sector). In late 2014, Chinese authorities undertook a series of measures (interest rate cuts, public infrastructure projects, tax breaks for small and medium enterprises) to stimulate growth. Declining oil prices (which comprise a major share of Chinese imports) are likely to impart an additional boost to the Chinese economy in 2015. But the era of double-digit growth in China has clearly ended, heightening the importance of GDP growth in other emerging markets to support global economic recovery.

India is positioned to pick up some of the slack left by declining growth in China. India posted disappointing growth numbers in the early post-recession years. But GDP growth is projected to reach 6.4 percent in 2015, rising to 7.0 percent in 2016. India’s strong economic performance reflects rising expectations over the pro-growth reform programme of Prime Minister, Mr Narenda Modi, whose Bharatiya Janata Party won a decisive victory in the May 2014 national elections. Monetary tightening by the Reserve Bank of India in 2013-14 succeeded in lowering inflation to the targeted level, enabling the central bank to undertake interest rate reductions in 2015 to spur growth. A warming of bilateral relations between India and the United States (manifested by Mr Modi’s visit to Washington in September 2014 and Barack Obama’s reciprocal visit to New Delhi in January 2015) further illustrates India’s emergence as an economic and geopolitical counterweight to China.

Growth prospects in the other BRICS countries are far less favourable. The economy of the Russian Federation is projected to contract by 2.9 percent in 2015, demonstrating the impact of plunging hydrocarbon revenues (which represent over 50 percent of fiscal receipts) and economic sanctions by the EU and U.S. (which show no sign of abating in the aftermath of Moscow’s intervention in Crimea and eastern Ukraine). The Central Bank of Russia’s dramatic interest rate hike in December 2014 failed to arrest the collapse of the ruble, which has lost half its value as the Russian economy implodes.

Brazil is forecast to grow by just 1.0 percent in 2015, reflecting weak prices of global commodities that comprise over 50 percent of Brazilian exports. Brazilian GDP growth is projected to increase to 2.5 percent in 2016, indicating economic spillover from the Rio Olympic Games. But Brazil remains highly vulnerable to shifts in global commodity prices, particularly oil, gas, iron ore, and agricultural products. This underscores the need for increased investment in advanced manufacturing (where Brazil lags behind China and other East Asia emerging markets) and knowledge-intensive services (where the country trails India).

GDP growth in South Africa is projected to reach 2.2 percent in 2014. This represents a gain over 2014 (1.4 percent), but is still less than half the average of the Sub-Saharan region (4.6 percent) and well below growth rates in other African countries (Angola, Kenya, Nigeria, et al). The ANC Government’s recent unilateral termination of Bilateral Investment Treaties with key European commercial partners (Germany, Netherlands, Spain, Switzerland) bodes ill for South Africa’s relations with the international business community.

The wide range of GDP growth projections in other emerging markets shows the divergent effects of shifts in petroleum prices, which have fallen 40 percent since June 2014. Along with Russia, hydrocarbon-centric economies like Venezuela face substantial economic losses as a result of the oil price plunge. Despite its standing as the world’s largest oil exporter, Saudi Arabia enjoys fiscal buffers and foreign exchange reserves to withstand declining hydrocarbon revenues. Meanwhile, oil importing emerging economies such as Turkey stand to reap major benefits from falling energy prices.

Conclusion

In January 2015, IMF Managing Director, Christine Lagarde, lauded the favourable GDP growth paths of the U.S. and U.K. But, she warned that the global economy could not depend on strong growth in a few countries and low oil prices to generate a sustained and balanced recovery.
Lagarde’s statement underscores the risks and uncertainties facing a world economy where the residues of the 2008-09 downturn persist in many countries.

David Bartlett
Economic Advisor
RSM International

This article was written by David Bartlett
Executive in Residence
Director of Global and Strategic Projects
Kogod School of Business
American University
Washington, D.C.


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