Cautious optimism for 2015


Financier Worldwide Magazine

April 2015 Issue

April 2015 Issue

2014 was undoubtedly a historic and newsworthy year for the global economy. The year began with much economic optimism, particularly as the global recovery seemed to finally be kicking into gear after years of false starts. However, as the year unfolded, the buoyancy which characterised 2014’s formative months soon dissipated, and was replaced by economic and geopolitical uncertainty across a number of regions.

The Ebola outbreak in West Africa devastated communities at great human cost and with an extremely detrimental effect on the entire region. Elsewhere, the winding up of the US Federal Reserve’s program of economic stimulus was particularly impactful for a number of the world’s emerging markets. Geopolitical factors also contributed to less than spectacular economic growth recorded in 2014. Continued conflicts and political uncertainty in the Middle East saw the region underperform markedly last year. Given the potential escalation of hostilities with ISIS, 2015 may also prove to be a challenging year for countries in the region. The ongoing conflict in Ukraine continued to damage the Russian economy, pushing it to the brink of recession. The situation was further exacerbated by the historic drop in oil prices towards the back end of 2014. Prices recorded in Q4 of 2014 in particular played a key role in helping to define the recent global economic outlook.

But despite these and other uncertainties facing the economy in 2015, cautious optimism is once again permeating the global outlook. According to a recent report from Euler Hermes, the year ahead will be characterised by a slight improvement in global growth, before more concrete growth in 2016. The firm’s report, ‘Overview 2015’, indicates that the global economy is likely to show a marginal increase of 0.3 percent on 2014’s GDP of 2.5 percent, reaching 2.8 percent by the end of 2015.

Though the year is likely to be punctuated by a number of significant challenges, 2015, according to the report, may see the global economy blow away the cobwebs of recent years and move on from the persistent economic disappointments and frustrations which have dogged the financial sector of late.


Though the Fed opted to wind down its program of quantitative easing (QE) in 2014, the decisions taken by both the European and Japanese central banks to introduce stimulus packages is likely to provide a timely and much needed boost to global growth, inflation and inflation expectations. However, it is important to note that the QE schemes of both banks have been designed as just parts of a multiyear recovery scenario, and must be considered as such. For the economies of the eurozone and Japan, which have seen years of stagnation, the road to recovery is likely to be a long and arduous one. QE will likely help move both Japan and the eurozone forward but both must be prepared for the long haul. As a result of the introduction of QE in Europe, the eurozone is expected to experience GDP growth of 1.1 percent in 2015, up from 0.8 percent last year and the highest level in four years. QE in Japan is expected to have a significantly bigger impact on GDP growth in 2015. According to the report’s data, Japan’s GDP will rise from 0.1 percent in 2014 to 1.0 percent in 2015.


Growth, or a lack thereof, will likely dominate the narrative surrounding the Russian economy in 2015. Given the country’s geopolitical difficulties, the Russian economy was required to endure a difficult 2014, however this year looks set to be considerably worse. It is unlikely that the current set of US and EU sanctions applied to Russia will be lifted anytime soon, so Russia’s journey to economic recovery could be a particularly difficult. Euler Hermes forecasts a contraction in the Russian economy of around 5.5 percent in 2015, though the country’s economy minister has predicted a slightly smaller reduction or around 3 percent this year. Regardless, for a country of Russia’s size and economic influence, any contraction of that magnitude could be catastrophic.

Since the beginning of hostilities in the Crimea region, market confidence within Russia has deteriorated at an alarming rate. Last year, capital outflow totalled $151bn, a 250 percent increase in capital outflows compared to 2013. Unfortunately for the Russian government, these large scale outflows are likely to continue throughout 2015, with a forecast between $100bn and $130bn.

The significant weakening of the Ruble will likely play a significant role in Russia’s worsening economic climate, having a detrimental effect on consumer spending and investment, as well as negatively impacting both the import and export of goods. A significant decline in investments and foreign direct investment are also expected in 2015, particularly as the sanctions regime against Russia has placed both direct and indirect bans on foreign investment in the country.


The US is expected to see a fruitful 2015. Euler Hermes’ report suggests that the US economy is likely to grow by around 3.1 percent in 2015. This growth will likely be built upon higher employment figures, which in turn should lead to an increase in income and consumption, as well as higher consumer confidence. Record low energy prices will also spur economic development throughout the remainder of 2015.

The year ahead will be characterised by a slight improvement in global growth, before more concrete growth in 2016.

The Fed’s decision to end its QE program, however, will hit the US economy throughout 2015. According to the report, the Fed will look to raise interest rates from 0 percent towards the end of the second quarter of 2015, and the process of raising the rate will continue at a measured and deliberate pace for the remainder of the year. This gradual approach is necessary as raising the rate too quickly could potentially threaten the recovery in the US, which is still at a relatively fragile point.


The UK is likely to remain one of the fastest growing Western economies in 2015, though the pace of its GDP growth is likely to cool off slightly in 2016. The report forecasts GDP growth of 2.5 percent this year, slowing to 2.2 percent in 2016. Much of the UK’s growth is expected to be built on increases in private consumption. Adjustments to savings and continued improvement in the national labour market are also likely to contribute. The UK’s unemployment rate is expected to average at around 5.8 percent in 2015. Wage growth remains low, however, and that is likely to continue through this year.

The automotive sector should contribute significantly to UK economic growth over the coming year. Since 2012, the sector has seen around £4.2bn worth of new investments. This increased activity has been based on the significant expansion of a number of local and overseas brands. One of the most attractive elements of the UK from an investor perspective, according to the report, is the flexibility of the UK’s labour market and the supportive fiscal regime established by the government. The decision to extend the Funding for Lending Scheme, a program dedicated to helping support and fund SME lending until 2016, has also proved to be positive. The step will help to generate considerable economic growth throughout the remainder of the year.


Germany, the eurozone’s largest economy and the fourth largest economy in the world, looks set to emerge from two years of stagnant economic development in 2015, and is likely to experience a somewhat moderate recovery. Its economy is expected to grow by around 1.3 percent this year. Unemployment should remain low throughout the duration of the year, despite the likely loss of around 270,000 low paid jobs as a result of a new minimum wage of €8.50 per hour.

Consumer spending is expected to increase, rising 1.3 percent, up from an increase of 1.1 percent in 2014. German exports should rise by 4.1 percent while imports should increase by around 3.8 percent.

However, greater German GDP growth is being constrained by particularly low levels of private investment activity. This has led to a downturn in industrial production and capacity utilisation.

Germany has been unsettled by the larger geopolitical issues at play in Eastern Europe. Though the country had a positive start to 2015, particularly in the private sector where the pace of output growth exceeded that seen at the close of 2014, there is still a large degree of caution surrounding the state of the national economy, particularly as public investment in the German economy continues to experience delay.


Since the turn of the century, Mexico has largely played second fiddle in Latin America. Brazil has been the dominant force in the region, and it remains the largest economy in Latin America. But Mexico is gaining considerable ground on its more illustrious neighbour. The Mexican economy increased by 2.3 percent in 2014 and is expected to grow by 3.2 percent this year. The nascent revival in the US economy will likely bleed over into Mexico and help increase the speed of growth over the course of 2015.

Likewise, the massive program of structural reform on which the Mexican government embarked in 2012 is beginning to bear fruit. The opening up of a number of segments of the Mexican economy, including the energy and telecommunications sectors, have not only increased and improved the country’s labour market, they have also had a positive effect on the strength of public finances and FDI into the country. Indeed, since 2012 FDI into Mexico has averaged 7 percent of national GDP annually, up from 5.5 percent between 2010 and 2012. With FDI inflows and regional exports increasing considerably in recent years, Mexico could conceivably challenge Brazil for the regional lead should the country’s recent economic resurgence persist.


The Chinese economy, though it has slowed somewhat in recent years, still expanded by 7.4 percent in 2014, and this year will likely expand by a similar amount – around 7.3 percent according to the report. Chinese growth in 2015 is likely to be based on improving global demand for external goods. The improvement in global demand will help to fuel employment growth domestically and will help to ease any residual deflation fears which were present in late 2014. Inflation in China was at just 1.5 percent in December, well below the 3.5 percent yearly target of 2014.

The global economic recovery will continue in 2015, with global GDP likely to increase by a marginal 2.8 percent. However, the pace will likely pick up more dramatically in 2016, with global growth expected to reach around 3.1 percent.

© Financier Worldwide


Richard Summerfield

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