Macro views for 2015

Mr van den Heiligenberg says a number of factors continued to keep growth in check.

These included tighter fiscal policy in a number of countries, geopolitical tensions, bank deleveraging in the euro area and more concerted attempts across a number of emerging market economies to either constrain credit growth or meet inflation targets.

As these headwinds fade, Mr van den Heiligenberg says the most likely outcome is some gradual strengthening of global growth through 2015 and a major divergence in monetary policy between the US and UK versus the euro area and Japan.

He says US and UK growth should maintain its momentum and the drag from Japan’s consumption tax increase should begin to diminish.

China’s switch to policy loosening should help stabilize growth and the prospects for India appear promising, he adds.

Mr van den Heiligenberg says the outlook for the euro area remains uncertain, but further policy easing should support the economy.

This economic view leads to a relative constructive view on risk assets at the start of 2015, he says.

Mr van den Heiligenberg says: “While we must be wary of the risks, there are several asset classes which present opportunities should global growth improve as expected to around 3 per cent next year.

“Furthermore, even though global growth has disappointed in recent years, there is still a chance that exceptionally loose monetary conditions trigger an even stronger global investment accelerator cycle.”

David Pages, senior economist at Axa IM, says his investment house’s current macro view is that the global economy is about to be pulled in different directions from different economies.

On balance, he says Axa IM sees overall global growth expanding at broadly the same pace in 2015 as in 2014 (3.3 per cent).

Within that, Mr Pages says he expects the US economy to see a clear acceleration towards 3 per cent in 2015 (from 2.25 per cent in 2014), underpinned by continued recovery in consumer spending.

In the eurozone and Japan, Mr Pages says growth is likely to be sufficiently weak to justify ongoing stimulus from their respective central banks, “although we expect Japanese growth in 2015 to exceed 2014’s rate”.

He says China has also seen further central bank stimulus and Axa IM expects that to help the economy stabilise at a still fast pace of expansion around 7 per cent.

Meanwhile, in the UK, Mr Pages says the economy is likely to lose its mantle of fastest growing G7 economy in 2015, although Axa IM still expect solid expansion of around 2.25 per cent.

He says: “Inflation is likely to remain subdued in each of these jurisdictions in the short-term, in part driven by local supply and demand conditions, but in part due to the decline in key global commodity prices, including oil and food.

“Signs of medium-term inflation acceleration are likely to become more obvious next year in the US and UK with signs of some acceleration in wage growth.

“These conditions are likely to see central banks moving in different directions across the globe.

“We expect the UK Federal Reserve and Bank of England to embark on gradual tightening cycles in 2015.

“The Bank of Japan and ECB are both committed to further balance sheet expansion (unconventional monetary policy stimulus) next year, although there is growing speculation about how the ECB might achieve this.

“The Peoples Bank of China has also opened the door to further monetary easing following its recent rate cuts.”

It is three main themes that are likely to shape the global macro landscape in 2015 - disinflationary growth, monetary policy divergence and growing emerging market differentiation, according to Anna Stupnytska, global economist at Fidelity Worldwide Investment;

She says the effects of a disinflationary shock from lower commodity prices seen this year should lend support to global growth in 2015.

Lower inflation will boost global consumption and allow many central banks to keep policy loose, she adds.

Ms Stupnytska says: “We expect the US to continue growing at a solid pace, on the back of renewed housing acceleration and stronger consumption, as lower energy prices provide a boost to real disposable incomes.

“The outlook for the euro area and Japan will remain challenging. In Europe, we expect a moderate growth pick-up, supported by the weaker euro, improving external demand, the ECB’s easing measures and a moderately lower fiscal drag.

“Should the cyclical picture deteriorate, however, the ECB is likely to do more. In Japan, the Bank of Japan’s additional easing measures could help boost inflation, but they are unlikely to have a meaningful impact on the real economy.

“Monetary policy is not a silver bullet, and both Japan and Europe must also address the issues of low productivity and low growth expectations through structural reform.

“The divergence of central bank monetary policy around the world has become clearer this year, and we expect this theme to continue in 2015, but there are limitations to how far it can go.”

Currency and interest rates are likely to act as equilibrating mechanisms, constraining the impact of differences in central bank policy, says Ms Stupnytska.

As the Bank of Japan and ECB continue on their easing paths while the Fed is moving closer towards normalising rates, Ms Stupnytska says further strength in the US dollar would contribute towards moderate tightening in US financial conditions, lifting pressure off the Fed to hike rates for some time.

She says the recovery has been sluggish and uneven in emerging markets, with some countries performing better than others, and this differentiation is likely to become more pronounced over the next year.

Ms Stupnytska says: “Emerging market growth will continue to be influenced by a variety of factors, including exposure to the US and China, dependency on commodities and progress on structural reform.

“Broadly speaking, emerging markets with close links to the US, rather than China, are likely to deliver better growth outcomes as the US economy continues growing at a solid pace.

“Countries like Mexico and Korea, with closer ties to the US, are better positioned in this respect relative to countries like Brazil and Indonesia, which are more vulnerable to China’s continued slowdown.

“In the environment of sustained low commodity prices, dependency on commodities is another key factor, where net importers like India and Thailand can benefit from lower prices, while exporters may continue to suffer.

“Perhaps most important to longer-term growth success is structural reform. Now, and into next year, EM countries are at a crossroads: face up to the urgent structural reforms needed to improve growth prospects internally, or risk spiralling further into a state of sluggish growth.

“It is the progress on structural reform that will help separate winners from losers over time.”

As always, Ms Stupnytska says there are risks to this outlook.

She says key risks for next year would be a hard landing in China, further geopolitical tensions and a surprise acceleration in US inflation, which could cause the Fed to tighten earlier than expected.

A hard landing in China would pose further problems for commodities and global growth more generally, she adds, impacting emerging markets to varying degrees.

Geopolitical problems, for instance the Russia-Ukraine conflict or tensions in the Middle East, also have potential to continue, and these could weigh on specific regions next year, Ms Stupnytska points out.

Louis Coke, senior investment manager at Charles Stanley, takes the view that the UK should continue to slowly work its way back to a healthy position, although this will be a bumpy ride.

Europe may well hover around zero growth for the short term, Mr Coke adds, although European companies with global earnings may present an interesting valuation anomaly.

The US should continue powering on ahead, he says, as it has one of the world’s most flexible economies, plus its reserve currency.

Emerging markets should lead the way in terms of headline growth, Mr Coke predicts, although he says he suspect China may take a back seat for a while.

In terms of a one to watch, Mr Coke recommends turning your eyes towards India following the introduction of the ‘Modi’ government.

He says: “A reduction in red tape should help business, along with falling inflation.”

Eric Clapton, managing director of Wellian Investment Solutions, says his investment house’s view, which helps shape the asset allocation of portfolios, are that global economic growth is unlikely to trend higher in the short term in 2015.

In many countries, Mr Clapton says that growth is still reliant on extremely accommodative monetary policy attempting to overcome excessive sovereign debt and the resultant bias toward deflation.

Cheaper energy prices and an increase in consumer spending can drive economies to break out of these doldrums, as experienced by the US where growth has also increased tax revenues and reduced budget deficits, he adds.

China and India are also economies that have levels of growth that are sufficient to improve the living standards of their populations, but Mr Clapton says even in those countries monetary policy is being eased to maintain momentum.

He says: “Such action is necessary to offset the drag on the global economy from Japan and the Eurozone.

“These actions have seen a steady rise in the price of risk assets to the point where certain valuations appear excessive, and we are now concerned that there may be a significant correction unless global growth improves in all areas, thus allowing monetary policy to be tightened.”

But James Spence, managing partner of Cerno Capital, takes a more optimistic view arguing world economies will, broadly speaking, continue to heal and normalisation will gather pace in 2015.

He says short term interest rates will begin to rise, initially in the US, and there will be a strengthening of the dollar and higher short term rates will exacerbate outflows from emerging markets.

Japan’s corporate profit revolution will continue and its corporate sector will record the best profit growth of developed markets, he adds.

Mr Spence says China’s residential property market will continue to cool and further downward pressure will be exerted on industrial commodity prices.

He says: “Wage growth, for all but the lowest paid, will begin to tick up however any increase in sense of well-being will be more from price efficiencies caused by disruptive technologies than wage growth or any other factor.”

Currently Peter Rutter, global equities manager at Waverton Investment Management, says his investment house believe that in 2015 economic recovery is likely to remain robust, although not particularly strong by historic standard, driven by the US.

Monetary policy will likely increasingly de-couple globally and potentially lead to more currency volatility, he adds.

Absent structural reforms in Japan and Europe means long term economic growth is likely to remain weak in these markets, Mr Rutter adds.

Furthermore, he says in the long run Waverton questions the viability of the Eurozone on a financial basis, and the risk remains that should the very strong political will for currency union come under pressure so will the financial stability of Europe.