2015's glimmer of hope in global economy

Here’s an early Christmas present for the economists of Wall Street: 2015 may be the first year in five in which they get to raise forecasts for global economic growth rather than cut them.

2015's glimmer of hope in global economy

That may be fanciful thinking as the year ends with Russia in crisis, investors rediscovering volatility, and central banks returning to the monetary pumps.

Other potential risks include more geopolitical flare-ups, elections from Greece to the UK, a hard landing in China, a premature exit from Federal Reserve stimulus and a slide towards deflation in Europe and Japan. Recent history is on the side of the pessimists.

A year ago, the median forecast of economists surveyed by Bloomberg News was for growth of 3.5% in 2014. It has since been scaled back to 3.2%. Cuts were also made in 2011, 2012, and 2013.

Trying to explain this year’s miss, economists at JPMorgan Chase blamed bigger-than-anticipated slowdowns in emerging markets and a failure by the eurozone to gain traction.

Still, in the holiday spirit, here are some grounds for optimism that the forecast of the Bloomberg News survey of 3.5% expansion in 2015 will, for once, prove too low.

Oil’s 40% slide this year will boost the spending power of consumers and companies. The IMF yesterday estimated the decline could add as much as 0.7% to global GDP next year. Oil consumers have a higher propensity to spend than producers and helped power growth accelerations in the late 1980s and 1990s.

Markets are “underestimating the upside risk to growth”, said Torsten Slok, chief international economist at Deutsche Bank, who estimates the G7 could grow faster than 3% as a result.

Central banks are set to ease monetary policy even further. The Bank of Japan recently ramped up its buying of bonds and may soon be followed by the ECB, while China and other emerging markets are cutting interest rates.

Even if the Fed raises rates for the first time since 2006, it’s unlikely to do so before mid-year and says it will act gradually and wait to unwind its balance sheet. The same goes for the Bank of England.

Credit Suisse estimates the balance sheets of the four major central banks will grow 13% next year, or $1.3 trillion, after this year’s 5% expansion.

The US is set for its fastest growth in a decade amid a firming job market and falling fuel costs. Unemployment is at a six-year low of 5.8%, homebuilder confidence is near a nine-year high, manufacturing is accelerating, and, having deleveraged, consumers are more confident than at any time since the last recession. Economists are eying a 3% expansion.

At hedge fund SLJ Macro Partners in London, co-founder Stephen Jen talks of a “converge up” scenario in which the US leads the world rather than a “converge down” environment in which it’s dragged back by events overseas.

The eurozone may not be so bad. A weaker currency should support exports, banks may lend more after being stress tested, the ECB is turning more aggressive, and governments are less austere. Investor and business confidence is climbing in Germany, the region’s lynchpin.

The crisis economies of Ireland, Greece, Spain, and Portugal are now growing faster than the region, a payoff for “tough love” reforms they were forced to deploy, according to Berenberg Bank’s Holger Schmieding, who predicts eurozone growth of 1% next year. Meanwhile, Spain’s economy grew 0.6% this quarter, capping its best year since 2008.

* Bloomberg

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