2015 Global Economic Outlook: Better Than 2014—but Not By Much (BusinessWeek)
OK, everybody, let’s get excited about 2015. Sure, there’s Ebola and Vladimir Putin and Islamic State terrorism. Western Europe is back in an economic rut, Japan’s recovery is faltering again, and China looks as if it’s headed for its slowest growth since 1990. But there are good things happening, too. Like, well, strong sales of recreational vehicles made in northern Indiana! “We’re in the recovery—we’re recovered,” says Derald Bontrager, chairman of the Recreational Vehicle Industry Association. “Obama visited this area three times. We were referred to as the ‘white-hot center of the economy.’ ” Bontrager, the chief executive officer of family-owned Jayco in Middlebury, Ind., predicts the industry will tie unit sales records in 2015 and break them in 2016, thanks to rising U.S. employment and continued low interest rates.
The good times aren’t confined to northern Indiana, the hub of RV manufacturing. The U.S. as a whole is emerging as the most likely candidate to power world growth in 2015. North Dakota is crazy busy with shale oil production. Seattle is swamped with Boeing (BA) orders. In Silicon Valley, Apple (AAPL) is selling tons of iPhones. New York City has more jobs than ever, as tech companies such as Google (GOOG)(with more than 4,000 employees in the city) lead the way.
It’s a welcome turnabout for the U.S., which until recently was the planet’s pariah. Japan called the 2008-09 financial crisis the “Lehman shokku,” and France dubbed it “la crise des subprimes.” After political brinkmanship brought the federal government within a whisker of default in 2011, China’s Xinhua news agency warned, “It is time for the naughty boys in Washington to stop chicken games before they cause more damages.”
Now it’s the rest of the world that’s botching things. The International Monetary Fund called global growth “mediocre” in October in its latest outlook. Chief Economist Olivier Blanchard wrote that “secular stagnation in advanced economies remains a concern,” and emerging markets can’t grow as fast as they used to without inflation.
Whether you’re the CEO of a multinational or a sole proprietor, it pays to have a sense of where the opportunities lie and the dangers lurk in 2015. That’s what this special issue is about. In the following pages, we offer a detailed look at key people, industries, and regions, along with the most important emerging trends. This introduction focuses on the macroeconomic picture—in other words, the conditions that will help or hinder all you strivers in 2015.
The map gives a snapshot of what’s ahead, based on the latest IMF forecast. South America is a mess, with Argentina and Venezuela leading the losers’ parade and Brazil not far behind. Russia and Western Europe are weak. All three economies of North America are looking pretty solid. The strongest growth is projected to be in South and East Asia as well as much of Africa, which is starting from a low base. Then there’s Greenland, which is … large. (The Mercator projection exaggerates the polar latitudes.)
The unifying theme is that the global economy is taking longer than expected to recuperate from the bursting of the debt bubble during the last decade. Three years ago, the IMF projected that the world economy would be back on track by 2015, growing at 4.8 percent. The U.S. has pretty much met the IMF’s (diminished) expectations. The disappointments, says the IMF, have been the BRIC nations—Brazil, Russia, India, and China—as well as parts of the Middle East, Europe, and Japan.
That’s led the IMF to reduce its forecast for 2015 global growth to 3.2 percent. It projects 3.1 percent growth for the U.S. next year, just 1.3 percent in the euro area, and 0.8 percent for Japan. China’s projected 7.1 percent growth, high compared with other nations’, would be the country’s lowest in 15 years. China isn’t geared for such a slowdown: Indebted investors such as property developers could default on a large scale if expansion comes in much below their expectations. The disparity in growth rates among the big four economies—the U.S., China, Japan, and the euro zone—was what Treasury Secretary Jacob Lew was referring to in October when he told Bloomberg, “You need all four wheels to be moving, or it isn’t going to be a good ride.”
Expect continued dissonance among economic policymakers in 2015. A taste of that came in late October, when the Federal Reserve announced it was ending its third round of bond buying—and two days later, the Bank of Japan said it was expanding its own bond purchases. Quantitative easing, as the bond purchases are called, is designed to drive up the market price of bonds. When prices rise, yields fall, lowering the rates for mortgages and other loans that matter to consumers and businesses. Next year, the European Central Bank may embark on its own quantitative easing over the objections of Germany’s conservative Bundesbank. That “remains our expectation for early next year,” economists at Barclays (BCS) wrote on Oct. 31.
Fights over taxing and spending will probably heat up next year, especially in the euro zone, where France and Italy are clashing with Germany over how big their budget deficits can be. The European Commission in Brussels allowed the French and Italians to run oversize deficits in October but warned that all euro countries will get an in-depth assessment in mid-November. Germany’s insistence on austerity makes it hard for euro nations to spark economic growth, says Dennis Gartman, author of a daily market commentary. “I tend to be a far right-winger,” says Gartman, “but there are times when you can’t run balanced budgets. When you have 15 percent unemployment, that’s one of the times.”
Some things about 2015 are known, such as the continued warming of the planet. Others are unimportant, like who wins the Super Bowl on Feb. 1 in Phoenix. (Sorry, football fans.) Keep an eye on things that are unknown and important: Will Russia’s and China’s clashes with their neighbors escalate into armed conflict? Will the Ebola epidemic break out of West Africa on a large scale? Will China snuff out Hong Kong’s democracy movement? Will British elections in May increase pressure on the United Kingdom to drop out of the European Union? Will one of the conflicts in the Middle East boil over? Any one of those could make 2015 a very ugly year.
Then again, there could be happy surprises. In the U.S., fracking and horizontal drilling continue to exceed expectations, raising domestic crude oil production more than 50 percent in just four years. Not only has the oil and gas boom shrunk the U.S. trade deficit and lifted the economies of Texas, North Dakota, and other oil patches, it’s also boosted consumers and the manufacturing sector. “The U.S. will someday have the lowest cost of energy in the world,” says Keith Nosbusch, CEO of Rockwell Automation (ROK). As a bonus, falling oil prices have diminished the power of countries such as Russia and Iran to finance troublemaking abroad. Iran’s government runs deficits when Brent crude drifts below $138 a barrel.
The oil boom is a victory for drilling technology, much of which was invented in the U.S. and is being deployed worldwide. That’s an example of an important theme for 2015: Business investment spurred by innovation may rescue the world from its protracted slump. Consumers are still having a hard time paying down debt because their inflation-adjusted incomes have fallen since the 2007-09 recession. Business is in a better position to lead the recovery. Companies are sitting on record amounts of cash because, with demand weak, they don’t feel any pressure to update their plants, equipment, and software. Great new technologies could set off a burst of capital spending by convincing CEOs they must have the next new thing to get ahead of the competition or avoid falling behind it.
Capital spending is the most volatile sector of the economy and often what turns slumps into booms. Michael Englund, chief economist of Action Economics in Boulder, Colo., says there’s rapidly rising demand for drilling and mining technology, medical gear, and efficient passenger jets. It so happens that U.S. companies such as Halliburton(HAL), Medtronic (MDT), and Boeing are leaders in those areas, but the benefits accrue to the buyers of the new technologies around the world, not only to the sellers.
New fuel-efficient jets from Boeing and its European rival, Airbus (AIR:FP), are an example. Airlines are shelling out billions for new fleets because their upfront cost is more than balanced by future savings, even at today’s lower prices for jet fuel. It helps that air travel growth has been strong—passenger-miles rose 6.7 percent in the 12 months through August. From a macroeconomic perspective, the important thing is that this investment boom doesn’t depend on strong overall economic growth, says Englund.
For the U.S. economy, the most critical unknown is whether 2015 will be the year the Federal Reserve finally begins to raise the federal funds rate, which it has locked at zero to 0.25 percent since the end of 2008. The lowest funds rate in history was perceived as an emergency measure during the financial crisis, but the economy still hasn’t shown that it can thrive without it. Critics say that cheap money is inflating asset bubbles and that the unemployment rate—5.9 percent in September—is as low as it can get without generating dangerous wage inflation.
The median forecast of the members of the rate-setting Federal Open Market Committee is for the funds rate to reach 1.25 percent to 1.5 percent by the end of 2015. Traders in the futures market are skeptical. They’re collectively betting that the funds rate will be only about 0.5 percent by then. That’s either a vote of no confidence in the U.S. economic recovery or a sign that traders think Fed Chair Janet Yellen is a dove who will keep rates low even after the economy gains strength, or maybe a little of both.
A Fed hike, whenever it comes, could affect growth, inflation, and exchange rates around the world. All else equal, higher interest rates in the U.S. would tend to attract more investment to the country, pushing up the value of the dollar vs. other currencies. That probably wouldn’t be enough to damage U.S. competitiveness significantly; even with its recent rebound, the dollar is still cheaper than it was a decade ago. If U.S. rates rise, countries such as India and Brazil that are fighting high inflation might be forced to raise their own rates to keep their currencies strong and avoid a spike in import prices. On the other hand, Europe and Japan, which have no fear of inflation, might welcome a drop in their currencies, which could spur exports and raise growth. “Devaluing is a mechanism to push deflation abroad,” says Stephen King, chief global economist atHSBC (HSBC) in London. “It’s a 21st century beggar-thy-neighbor policy.”
“America—still the world’s tallest midget,” read a headline on a report in late October by David Rosenberg, chief economist at asset manager Gluskin Sheff (GS:CN). The shorter midgets regard the U.S. with envy. In the euro zone, the straitjacket of a single currency works as the gold standard did before countries abandoned it during the Great Depression: It prevents weaker economies such as Greece and Portugal from depreciating their currencies, which can be a quick way for a nation with high labor costs to boost its exports and juice its economy. As for Japan, a sharp increase in consumption taxes walloped its economy this spring. A second increase is scheduled for 2015, but Prime Minister Shinzo Abe may seek to delay it if the economy remains weak. “The Japanese are throwing anything they can at the wall to make something stick to ward off deflation,” says David Morton, a partner at Rocaton Investment Advisors.
China is suffering its own brand of deflation. Wholesale prices have fallen every month since April 2012. Although President Xi Jinping has vowed to promote consumer-led growth, which would please the public by raising living standards, his efforts have fallen short. Business investment accounted for 49 percent of GDP last year, up from 35 percent in 2000, according to World Bank data. So much spending on plants and equipment leads to excess production capacity, which encourages price slashing that destroys profitability. China is a major importer of raw materials, so a slowdown in 2015 would continue to harm resource-rich nations in Asia, Latin America, and Africa. Chinese authorities are likely to try to help specific sectors like agriculture and small and midsize enterprises, but “their levers are becoming less effective,” says Andrew Polk, resident economist at the Conference Board China Center for Economics and Business in Beijing. “The downward pressure on the economy is too powerful to be offset by slight policy adjustments.”
One drizzly day this fall,Carnival (CCL)UK Chairman David Dingle sat in a lounge of the Cunard Line’sQueen Mary 2, which was docked in Brooklyn, N.Y. He said demand for sea travel was good despite news reports about Ebola. “For a discretionary business such as ours,” Dingle said, “seeing what we hope is the final end of a recessionary period is very good. It’s really been a period where we had to tighten our belts considerably.” Pricing overall was still “bumpy,” he said, but it was beginning to recover at Cunard, a luxury brand.
Cunard saves money on fuel by propelling its hulls through the waves at a slower pace. Trans-Atlantic voyages that decades ago took five and a half days are now taking eight, Dingle said. It’s an apt metaphor for the world economy in 2015: slower than it once was but moving forward. Hours after Dingle provided his upbeat outlook, the QM2—the ocean liner, mind you, not some exotic form of quantitative easing—set sail for the Canadian Maritimes. Slowly.
CoyisBloomberg Businessweek's economics editor. His Twitter handle is@petercoy.