Despite multiple divergent trends, the global economy is set to accelerate a little in 2015.
The global “growth rotation” continues—and may even be accelerating. The falling prices of oil and other commodities and the divergent paths of central banks mean the developed economies, especially the United States, are taking a stronger lead.
“Falling oil prices and more stimuli from key central banks will boost global real GDP growth from 2.7% in 2014 to 3.0% in 2015 and 3.4% in 2016. While the plunge in oil prices (down 59% from their June 2014 peak) and other commodity prices is rattling financial markets and inflicting pain on some countries (e.g., Iran, Russia, and Venezuela), the net impact on global growth will be positive. As a point of reference, the 67% drop in oil prices in 1985–86 was followed by a global boom. Three decades later, the global environment is different, and a boom may not be in the offing, but the big drop in oil prices will boost growth,” according to IHS Global Insight’s January World Flash, an update on the global economy from IHS Chief Economist Nariman Behravesh and IHS Senior Research Director of Global Economics Sara Johnson.
United States: Growth will remain solid, notwithstanding weakness in other parts of the world and plummeting oil prices. The US economy should be able to grow by 3% in 2015 without too much trouble. Exports are only 13% of GDP, compared with 68% for consumer spending, which is getting a big boost. Furthermore, oil sector investment, expected to drop around 20% in 2015, is only 2% of GDP. Thus, strong domestic demand growth will—as it has in the past—provide a strong foundation and buffer for the US economy.
Europe: A Greek exit is a low-probability scenario, but if it happens it will not derail the Euro zone recovery. If such an exit were to happen, the contagion effect for the rest of the Euro zone would likely be small. While the Euro zone clearly still has serious problems, IHS believes the beneficial impact of very low oil prices, a weaker euro exchange rate, and increasingly accommodative monetary policy will help the economy to accelerate very gradually this year and next.
China: Growth is set to decelerate, but if it gets too low, more stimuli will be forthcoming. In 2015, we expect China’s economy to decelerate in response to headwinds from a debt bubble, excess industrial capacity, and unstable external demand. As a result, real GDP growth is projected to slow from 7.4% in 2014 to 6.5% this year. Anything lower would likely trigger additional monetary and fiscal stimulus.
Other large emerging markets: Split BRICs. The divergence in the performance of the big emerging markets is widening. IHS expects the Russian economy to contract 4% this year amidst the “perfect storm” of falling oil prices, economic and financial sanctions, and capital flight. Meanwhile, the moribund state of the Brazilian economy is likely to continue. On the other hand, growth prospects in emerging markets such as India, Indonesia, the Philippines, Vietnam, Kenya, Morocco, and Poland look bright. India, in particular, looks very promising, with growth rates that could exceed China’s.