Global Economic Outlook - May 2015

Navigating a new world

Editorial

The fall of the oil price from USD 110 to around USD 50-60 in six months’ time can be compared to a ‘shot in the arm’ for the world economy, according to IMF Managing Director Christine Lagarde. But is it working sufficiently?

The answer seems negative because global economic performance was again disappointing, at least when compared to the expectations we presented in our December Economic Outlook. At the time, global growth was indeed expected to pick up in 2015, but at this juncture, we can no longer uphold that view. Instead, we expect growth to be flat this year and to not pick up until 2016.

At first sight this seems surprising. The eurozone has delivered in the sense that its 2015 growth expectations even had to be adjusted upwards from 1.2% to 1.5%, a small increase but still an improvement. As we will elaborate in this new issue of our biannual Economic Outlook, this was helped by the ECB providing the monetary support to the system by way of an unexpectedly large, and unprecedented, quantitative easing programme. Formally designed to lift the eurozone out of a spell of deflation, it has had wider impacts. Even before the details of the programme were unveiled, the euro started to fall against the US dollar, providing a stimulus to exports. Meanwhile, Asia, the world economy’s power house, continues to grow at 4.7%. As China is witnessing an unavoidable slowdown, it is measured and well-managed so far. India’s economy is expected to accelerate far more than we anticipated in December, helped by good policies. Both the eurozone and even more so these Asian giants are pushed up by the said ‘shot in the arm’.

However, we may have to consider the side effects of the ‘shot’ to get the right picture. Indeed, US growth had to be adjusted somewhat downward. The impact of the oil price is ambiguous, as the US has become a leading oil producer. US households and energy dependent firms benefit. But US shale producers bear the pain, as was arguably the intention of the OPEC countries when making its hallmark decision in Vienna last November – to not adjust its production quota. For other countries, there is no such thing as ambiguity. Russia is simply badly hit and will face a severe recession. Brazil is not helped either as its high-cost deep water oil production is severely affected as well. Latin American growth had to be adjusted with further downward corrections due to the less prominent price fall of other commodities, predominantly metals. Put together, these side effects of the ‘shot’ seem simply too strong to prevent the upswing to occur, at least in 2015.

John Lorié, Chief Economist Atradius

 

Executive summary

 

Global economic growth remains tepid and weaker than expected. A ‘new normal’ of structurally lower growth rates in both advanced and emerging markets has become manifest.

Key points

• Global economic growth is forecast to remain modest at 2.7% in 2015, the same rate as last year. Growth may pick up in 2016, but only slightly.
• The eurozone recovery is gaining strength with 2015 economic growth forecast at 1.5%. The United States’ economy is projected to expand 2.9%.
• Both Eastern Europe and Latin America face a difficult year with economic growth at – 0.4% and 0. 5% respectively – though that should recover somewhat next year. Asia’s economy, excluding Japan, is forecast to grow rapidly at 6.1%.
• The insolvency environment remains difficult despite the decrease in the overall number of insolvencies in many markets. In general, Atradius forecasts a slight improvement in conditions across advanced markets in 2015.

Global economic conditions have weakened over the past six months despite the acceleration of growth in the eurozone and the positive impact of low oil prices on many countries – as discussed in Chapter 1. Global growth is forecast to rise slightly next year, but remain modest from a historical perspective. This may represent a ‘new normal’ of lower potential growth in both advanced and emerging markets as a result of ageing populations, slowdowns in the application of new technologies and lower investments.

Global trade growth is similarly expected to remain low compared to pre-2007 rates, but may pick up somewhat compared to last year. Trade growth suffers from a change in the global supply chain structure, but could be boosted in the coming years by several planned regional trade deals. Global trade is forecast to grow 3.3% in 2015 and to pick up, reaching 4%, in 2016.

Economic growth in advanced markets has gained strength – as argued in Chapter 2. Especially the eurozone has experienced improving conditions with all member states returning to positive growth figures and rising consumer confidence. The economy benefits from the stimulus by the European Central Bank, low inflation and the cheap euro. The recovery has also so far withstood the renewed uncertainty over Greek debt and its place in the monetary union. Both the United States and the United Kingdom continue to experience solid economic expansion, although the outlook has eased in the first part of the year.

Emerging market growth slowed last year and is expected to ease further in 2015. As Chapter 3 explains, geopolitical risks, low commodity prices and country specific issues in some of the larger emerging markets are weighing on economic growth. In Latin America, the three largest economies – Brazil, Venezuela and Argentina – are all forecast to contract in 2015. In Eastern Europe, Russia and Ukraine will be in recession and in Asia, the Chinese economy will continue to slow down. However, in all regions, many countries that have sound policy frameworks should continue to grow strongly.

The outlook for the business climate across the globe is mixed at best – as presented in Chapter 4. In the eurozone, conditions remain difficult and insolvencies were still 87% above 2007 levels in 2014 , despite a fall in the number of insolvencies in many member states. For 2015, Atradius forecasts insolvencies to fall 7% in the eurozone and most strongly in Spain and the Netherlands. Conditions in the United States and the United Kingdom are expected to improve as well. Many of the most important emerging markets, in contrast, such as Brazil, Russia and China, are projected to face increasing insolvencies, but from a relatively low level. Overall the business climate will remain difficult with global growth expected to remain modest this year and in 2016.