THE GLOBAL MACRO FORECAST : Contrasting outlooks

In the US, GDP growth has "normalised" over the past few years, leading the Federal Reserve to terminate its Quantitative Easing policy at the end of 2014. Its next task will be to end its zero-rate policy... Things are much different in Europe, where we're still wondering about the longer-term impacts of the Expanded Asset Purchase Programme recently launched by the ECB: will the recent rebound in confidence and currency depreciation be enough to kick start economic activity for good? Finally, though they were relatively spared by the crisis, emerging economies are struggling to redirect their growth model and are entering their fifth year of economic slowdown. These differences in terms of economic conditions and the associated divergence in monetary policy have triggered significant currency fluctuations... Meanwhile, oil prices, which were thought to be firmly set at around $100 per barrel, fell 50% in just a few months before slightly picking up again. While it is never easy to forecast how the global economy will evolve, the task is even trickier than usual today.

Emerging economies: persistently disappointing growth

Just like each year since 2010, growth is expected to slow in emerging economies in 2015. On the positive side, by helping to ease inflation in most emerging countries, the decline in commodity prices (agricultural commodities in particular) has recreated some monetary policy leeway. Faced with a continuous slowdown in activity, the central banks of several emerging countries (China, India, etc.) have been taking advantage of this leeway. For the first time since the wave of monetary policy tightening following the announcement of the Fed's tapering intentions in spring 2013, they have been able to cut their interest rates. Unfortunately, after years of rapidly rising corporate indebtedness, there is a limit to how much faster credit can be distributed in these regions! For many emerging economies, the depreciation of their currency could become the easiest - and quickest! - way to stimulate growth. While there is some room for manoeuvre here, it too is limited. In some economies, a significant portion of debt is denominated in USD. Furthermore, these policies would almost certainly revive international tensions. Monetary policies and currency fluctuations can only provide a temporary boost to these economies. They can't resolve the structural problems many are facing.

United States: growing slowly… but moving closer to full employment

After rising sharply in H2 2014, economic activity appears to be struggling again in the United States. First-quarter GDP growth was particularly disappointing. This can be partly attributed to seasonal adjustment problems (according to a recent San Francisco Fed paper ⁽¹⁾ , Q1 growth should have been closer to 2%). Other factors have also contributed: home sales and housing starts were disrupted by the harsh winter and exports were slowed by the West Coast Dock strike. The pace of economic activity should gradually pick up over the next few months. Helped by persistently low interest rates, the slow easing of lending conditions and the tentative normalisation of household formation, residential investment should continue to recover. Drawing on slightly faster growth in the wage bill, consumption should remain on a good track. Against this backdrop, the recent dip in capex orders shouldn't be a cause for concern: after dipping in the first quarter, business investment should return to moderate growth. Opposing forces are nevertheless at work: the drop in oil prices has not finished weighing on investment in structures in the oil sector, and the dollar's substantial appreciation is sure to put the brakes on exports. All in all, GDP growth should stand above 2% in 2015. The economy is still moving toward full employment and, although wage rises have long been limited, it should soon get a boost from the low unemployment rate. After an almost seven-year "zero interest rate policy”, the Fed is expected to raise its rates in 2015. It will take pains, however, to explain to the markets that this move will not mark the beginning of a traditional tightening cycle... at least not as long as it considers the recovery fragile and inflation under control.

⁽¹⁾The Puzzle of Weak First-Quarter GDP Growth, FRBSF Economic Letter 2015-16

Euro zone: growth is coming back...

Growth has clearly picked up in the euro zone. As in the US, the drop in oil prices has supported consumption and, in many countries, domestic demand is on the rise again. The launch of the ECB's massive asset purchase programme appears to have played a big role in the recent upturn in economic activity. The size of its sovereign bond purchases largely exceeds net issues of government bonds and has significantly altered the balance of the bond market. By supporting exports, the subsequent depreciation of the euro is playing a key role in stimulating growth. In addition, the ECB's clear commitment to combating deflationary pressures has created a positive shockwave of confidence. Of course, this turnaround is uneven and the effects of the oil price decline will wear off. But consumer sentiment has improved and, in most euro zone countries, labour markets are improving. Slowly, companies are expected to begin investing again... particularly if credit conditions continue to ease. GDP growth should reach 1.6% in 2015 and 2.1% in 2016. These rates are definitely higher than the region's growth potential. Still, they can be maintained without tension for several years. Indeed, unlike the United States, the euro zone is still a far cry from full employment. What's more, the household and corporate deleveraging process is much less advanced than in the US. Finally, even by “making the best use of flexibility within the existing rules", fiscal policy will continue to weigh on economic activity through the end of the decade.

 The Macro Team