Call it the Great Divide: The new year figures to be one of robust economic growth in the US, with slowdowns, stagnation and setbacks everywhere else in the world.
The list of global problems is indeed long and worrisome. Europe and Japan teeter on the edge of recession. Russia careens toward a full-blown economic crisis. China’s once-torrid growth is slowing faster than previously forecast. And many emerging economies are getting slammed by plunging oil prices.
All the overseas problems put together, though, are not enough to derail a strong US economy, Wall Street analysts say. The Commerce Department stunned markets Dec. 23 by reporting that the nation’s total economic output grew at an annual pace of 5 per cent in the third quarter. The result blew past an already strong estimate of 3.9 per cent.
“Spirits unleashed,” was how Mark Zandi of research firm Moody’s Analytics Inc. described the US economy even before the final estimate for the third quarter came in.
The good US economic news, forecasters said, will translate into solid but not spectacular returns in the stock market, which has been on a long bull run.
The Standard & Poor’s 500 index was up about 11.4 per cent for 2014, its third straight year of gains since the Great Recession. Most forecasts call for returns to be about half that in 2015 and beyond.
Forecasts can always be wrong, of course, but the new year begins with a set of unusually well-defined themes that, unless something dramatic happens, figure to play an important role in shaping the year’s global economic picture. Here are a few of them:
A strengthening US economy
Although the third-quarter Commerce Department report was a pleasant surprise, most forecasts call for gross domestic product — the value of all goods and services produced in the country — to be lower but still healthy near or above 3 per cent. That’s a rate not achieved for a full year since the Great Recession.
The economy remains a long way from full employment, Zandi said, but job growth now averaging around 225,000 a month should be enough for the next 18 months to absorb the number of underemployed and unemployed, which together account for about 1.25 per cent of the labour market.
Even before mid-2016, wage growth, long a missing ingredient from the US recovery, should take hold and reach 3.5 per cent before inflation over the next two years, around 2 per cent after inflation.
Improved moods among consumers could mean more purchases of cars and other big-ticket items that already are back to pre-recession levels.
Morgan Stanley expects the still-struggling housing sector to bounce back with 10.2 per cent growth in residential investment. The 1.8 per cent growth for the just-completed year was hampered by a difficult winter, an uptick in mortgage rates and tight lending standards that only now are starting to ease.
Moody’s also noted that nearly 3 million millennials — those 18 to 34 years old — moved in with their parents since the start of the recession seven years ago, and they represent pent-up demand for housing.
Analysts expect that only the energy sector, hurt by a plunge in oil prices, will lag behind.
Overseas struggles
US economic strength is offset by weakness in Europe, where policymakers are contemplating further stimulus to ward off the risk of deflation — a debilitating condition of falling prices and wages.
Morgan Stanley, Goldman Sachs Group Inc. and other banks forecast growth for the Eurozone to be less than 1 per cent, only slightly above what Citigroup Inc. describes as the region’s “shabby recovery” of a meagre 0.68 per cent on average since the financial crisis.
Bank of America Corp.’s Merrill Lynch unit calls the risk of European deflation a “clear and present danger.” The German economy, the region’s largest, slowed to about 1.5 per cent growth last year and Citigroup and others expected it to slow further, to about 1.1 per cent in 2015.
A relative bright spot is Spain, where fiscal stimulus, rising business confidence and an improving labour market are expected to contribute to growth of a still-modest 1.6 per cent.
Russia, the Eurozone’s third-largest trading partner, is near recession as it struggles with cheap oil and international sanctions over its actions in Ukraine. Its currency fell more than 60 per cent against the dollar last year.
Japan, which tipped into recession in the third quarter, will continue to struggle with 1 per cent growth, according to most forecasts. China, once a growth engine, now is considered a worry, as its economy slows to 7 per cent or below amid questions about the health of its property markets and financial system. Moody’s said China’s growth is likely to be the slowest since 1990.
The picture is mixed for Central and South America. Citigroup is forecasting 4 per cent growth for Mexico but much weaker performances — less than 2 per cent — for the region’s other big economies: Brazil, Argentina and Venezuela.
Analysts consider the US economy to be insulated, for now, from the world’s travails mainly because exports account for only about 13 per cent of its total economic output and foreign sales for only 10 per cent of total sales by the 500 major companies in the S&P 500 index.
A stronger US recovery already was on track when oil prices began their more than 40 per cent drop six months ago to levels not seen since the Great Recession. Prices started to stabilise as the holidays approached around $55 a barrel for West Texas Intermediate crude.
The result will be a windfall for global consumers in oil-importing countries. Moody’s Chris Lafakis estimated that every $10 decline in oil prices corresponds to about a 0.2 per cent gain in real US economic growth.
If oil stays at current levels, he said, the net effect will be to channel $120 billion (Dh440 billion) from the oil sector — or about 13 per cent of corporate profits — to the rest of the US economy.
Oil is expected to drift higher but remain relatively cheap throughout the year, more likely in the range of $80 a barrel, according to several forecasts.
Oil exporters such as Venezuela, Iran and Russia will continue to suffer, but Citigroup estimated that the total global redistribution of income from oil producers to consumers will be about $850 billion, or nearly 1.1 per cent of global GDP.
For Europe and Japan, cheap oil could provide a significant boost to their central banks’ efforts to pump up growth.
Analysts, in general, summed up their forecasts with a warning that even with a world-beating US economy, investors should enter 2015 with tempered expectations.
The bull market will probably continue, said Candace Browning, Merrill Lynch’s head of global research, but “the sentiment is far from euphoric.”
