Global Growth: What to expect from the major world economies for the rest of 2015
Recent research by the Federal Reserve Bank of San Francisco shows that first quarters in the U.S. have been exceptionally weak over the last 25 years, even after seasonal adjustments. Whether you believe seasonal anomalies or structural weakness is to blame for the sharp decline in 2015, Credit Suisse says things are about to get better both in the U.S and the rest of the world. Read on for the bank’s second-half projections for the world’s largest economies.
U.S.: Snapping Back
The steep decline in oil prices during the latter half of 2014 was a mixed blessing. The 4.4 percent year-over-year increase in fourth quarter consumer spending was the largest since 2006, a windfall likely attributable to consumers saving money at the gas pump. But a pronounced slowdown in drilling activity among American oil companies contributed to a drop in industrial production, investment, and capital goods orders in early 2015.
James Sweeney, Chief Economist for Credit Suisse’s Investment Bank, expects the combination of a strong labor market and cheap oil to continue bolstering retail sales. Industrial production momentum (a three-month rolling measure) is also expected to accelerate in the coming months. Overall, Credit Suisse’s economists foresee 2.2 percent GDP growth in 2015.
An economic upswing would clear the way for the Federal Reserve to hike interest rates, a move Credit Suisse expects in September. On a recent conference call with investors, Sweeney laid out two post-hike scenarios. Scenario 1: Rising rates derail economic growth. Scenario 2: The economy chugs along, leaving bond market participants positioned for a “lower-for-longer” regime scrambling to revise their strategies. Market volatility soars. Either way, the post-Fed world appears to be an uncertain one.
Europe: Keep the Party Going
As in the U.S., cheap oil has had a dramatic effect on European consumer spending. Unlike in the U.S., the effect has persisted into 2015, augmented by the quantitative easing program the European Central Bank announced in January. The European financial system, long a drag on the regional economy, is also improving, thanks to a combination of central bank intervention and the largely positive results of stress tests conducted last year. Loan volumes are up and interest rates on those loans are falling.
The combination of savings from cheaper fuel, a more functional financial system, monetary easing, and a cheap euro should keep the region’s economic trajectory on course in the second half of the year. Though some investors have started to be concerned that the improving economy could lead the central bank to begin tapering its asset purchases, Credit Suisse Co-Head of Global Fixed Income & Economics Research Neville Hill says that, at 0.5 percent, core inflation is still too low for the ECB to consider such a move. The real risk to the region is that Greece will fail to strike a deal with its creditors.
Japan: Post-tax Stabilization
Tax hikes can have long tails. A looming sales tax increase in April 2014 sparked a burst of strong consumer spending, household investment, and public infrastructure projects in 2013 and early 2014. But, starting in the fall of 2014, consumer spending fell sharply. Making matters worse, rising food inflation offset some of the savings consumers were enjoying due to cheap oil.
But Credit Suisse economists say domestic demand should bounce back this year. Meanwhile, foreign demand for Japanese goods has been strong and is expected to remain so. Still, the Japanese economy is only expected to grow 0.7 percent in 2015 – better than the flat growth of 2014, but still not impressive. The Bank of Japan may yet add to its stimulus measures in 2015. Stay tuned.
China: Trying to Gain Traction
Remember when it was big news that Chinese officials would tolerate growth of “just” 7.5 percent? In the first quarter of 2015, growth slowed to a seasonally adjusted 5.3 percent, the most lackluster showing since 2006. Credit Suisse expects the Chinese government to inject more liquidity into the system by cutting reserve requirements for banks and allowing them to borrow more money from the central bank. More public spending on infrastructure projects is also possible.