How Will The Global Economy Do In 2015? Here's What You Should Know

How Will The Global Economy Do Next Year? Here's What You Need To Know
AYLESBURY, ENGLAND - MAY 10: (Front row L-R) Lew Jacob, U.S. Treasury Secretary, George Osborne Britain's Chancellor of the Exchequer, and Mervyn King, then Governor of the Bank of England, react, as they take part in the family photo with Mark Carney, then Governor of the Bank of Canada, (Top L) and Mario Draghi President of the European Central Bank (Top R), at the G7 finance ministers and central bank governors meeting on Friday May 10, 2013 in Aylesbury, England. (Photo by Alastair Grant -
AYLESBURY, ENGLAND - MAY 10: (Front row L-R) Lew Jacob, U.S. Treasury Secretary, George Osborne Britain's Chancellor of the Exchequer, and Mervyn King, then Governor of the Bank of England, react, as they take part in the family photo with Mark Carney, then Governor of the Bank of Canada, (Top L) and Mario Draghi President of the European Central Bank (Top R), at the G7 finance ministers and central bank governors meeting on Friday May 10, 2013 in Aylesbury, England. (Photo by Alastair Grant -
WPA Pool via Getty Images

The world can be a scary place, George Osborne seems to like suggesting, with every other economy in choppy waters as Britain's economy enjoys increasingly smooth sailing.

Speaking in October, the Chancellor said: "Britain is part of a global economy, but that doesn’t mean Britain is just going to be buffeted by the storms....The eurozone risks slipping back into crisis. Britain cannot be immune from that."

As 2015 nears, HuffPostUK asked various City experts to assess where the risks will lie for the global economy. Will we see Britain rocked by the storms, or emerge to even sunnier waters?

Europe in the doldrums

The economic drama looks set to continue on our own doorstep as Mario Draghi and European leaders try to pull the Eurozone back from the brink.

The European Central Bank boss infamously pledged to do "whatever it takes" to hold the Eurozone together last time a breakup loomed in 2012, and economists suggest that Italy and Greece's ailing economies will pile on the pressure.

The most popular political party in Greece, Syriza, wants to renege on the terms of Greece’s €240bn loan from the EU and IMF. Italy has a shrinking economy, government debt of €2,300bn and all three main opposition parties are anti-euro.

There are concerns that the Eurozone could slip into a Japanese scenario of deflation and little growth. Given the internal political tensions around the monetary policies being promoted by the European Central Bank in the face of German opposition, the Eurozone may be doomed to a poor performance in 2015 even if the euro weakens further as the possibility of fuller Quantitative Easing approaches.

John Whittaker, an economist at Lancaster University Management School, told the Huffington Post UK: "Never mind Syria, ISIS, ebola or a feeble Chinese economy; the weakest link in 2015 may be the eurozone. Suspicions are returning that some country might leave the euro – or be forced out."

"The EU institutions have much to lose, politically and financially, from euro disintegration. But maybe it is time to recognise that debts can’t be repaid, that austerity breeds unemployment and social disorder, that the rules to restrain government spending will never work, and that the awful disruption of a euro breakup might be less painful than the cost of keeping it together."

Kathleen Brooks, UK & EMEA research director at Forex.com, agrees that Europe "will continue to struggle", adding that many expect the European Central Bank to turn on the money printers in an act of "quantitative easing", or QE.

"We don’t think they will do it, as we still think the political opposition to QE is large," she explains. "Sovereign concerns could also mount if the left-wing Syriza party wins Greek elections that are expected to take place in the spring."

America Unbound

America is expected to storm on ahead, but the question is will it cope with its rivals being so sluggish.

Forex.com's Brooks predicts "greater segmentation in economic performance with the US leading the way", adding: "We doubt that the US can carry the burden of global growth on its own, so we could see expectations for global growth in 2015 get revised lower, which could hit stock markets."

America's exports could end up getting hit by the poor trading conditions, forcing policymakers to push back when they would raise interest rates, so as to avoid pushing up borrowing costs.

This is predicted by Nobel Laureate Paul Krugman, who told an audience at the Arab Strategy Forum in Dubai that “when push comes to shove they’re going to look and say: ‘It’s a pretty weak world economy out there, we don’t see any inflation, and the risk if we raise rates and it turns out we were mistaken is just so huge’."

He went on: “It’s certainly a real possibility that they’ll go ahead and do it, but probably not, and for what it’s worth I and others are trying to bully them into not doing it.”

This decision could force the Federal Reserve to try and talk down the dollar in a bid to dampen its value and avoid hampering exports.

"For the first half of the year we expect the dollar to rally, however, we doubt that the Fed will want to see its currency rally while others fall, as this could hurt US exports," Brooks predicts. "Thus, we could see the Fed scale back rate hike expectations and try to talk down the dollar in the second half of 2015, if the buck continues to strengthen."

Chinese Whispers

China's economy has been motoring along nicely over the last few years, but experts worry about whether 2015 will be the year that it starts to peter out, with potentially big results.

Nicola Marinelli, portfolio Manager at Sturgeon Capital, says: "China, like it or not, has been the main engine behind global growth for many years and it is now facing a real risk of a hard landing, driven by the property slump and the related increase in bad debts in its financial institutions."

A Chinese slowdown could see investors take fright and move their money elsewhere to avoid the market instability.

"I fear that the negative news flow and a potential devaluation of the renminbi could weigh on all the other emerging Markets, leading the way to heavy capital outflows," Marinelli warns.

How will oil affect everything else?

Most of the oil-producing nations will be keeping an eye on the oil price, which as it declines could see them start to suffer.

"While this is good news for the global consumer, it could make it harder for the west to suffer another financial storm, as big oil producers went to the rescue of our banks back in 2008, and they may not be able to do so if their oil revenues start to shrink," Brooks warns.

Others analysts are more circumspect, like Beaufort Securities' chief investment strategist Mike Franklin.

"As 2014 ends, the big themes include the sharp fall in the price of crude oil – now down 42% since late-June – triggered by the phenomenal success of US shale gas development, bringing the country to being almost the largest global oil producer," he says. "Critical to assessing prospects for 2015 is a judgement of how long OPEC, reflecting the currently immovable decision of Saudi Arabia to maintain production, will keep the oil price at around the present $60 level or lower.

"A recovery in the oil price will depend heavily on when Saudi Arabia decides it has regained some control of the global oil market by crimping US production of shale gas where costs at $80 pbl typically stand above the current world price. The US is currently considering lifting the 40-year export ban on its oil partly due to the need for suitable refining capacity as it approaches self-sufficiency and it will be interesting to see if this will be a factor in any recovery of the oil market."

Franklin predicts that the effects could be felt by economies as far flung as Japan, warning that the nation could struggle to hit its 2% inflation target if the price of oil keeps falling, forcing the Bank of Japan (BOJ) to go for further stimulus measures.

"This could be a tricky year for Japan if its enormous stimulus programme does not start to reap economic benefits then the BOJ’s credibility could be called into question," he warned.

"So far the market has been tolerant of Japan’s monetary largesse, but it may start to question these practices in 2015. If this happens then we could see a sharp drop in the yen and Japanese bond yields start to rise."

Any outside-the-box threats?

2015 looks set to offer a range of surprise economic risks, just as 2014 did before with the Ebola virus outbreak disrupting air traffic, terrorist activity in the Middle East and tensions with Russia over its annexation of Crimea sending shock waves through the financial markets.

Beaufort Strategies' Franklin notes: "Assumptions about the levels and duration of depressed commodity prices are critical to assessing prospects for 2015 as are how soon and how quickly interest rates will rise in those countries such as the US and UK after the end of quantitative easing."

Sturgeon Capital's Marinelli points to oil prices as the risky factor to keep an eye on. "The price of oil is politically driven now more than ever," she says. "With this background in mind, the oil price has really got the potential to surprise in 2015 with more sharp movements up and or down."

The Bank of England has warned that its the outlook for the global economy has got worse over the last few months in its December Financial Stability report, with the heightened risks potentially hampering Britain's economic growth.

"The global economic outlook has weakened since the June 2014 Report and market concerns over persistent weak nominal growth and geopolitical risk have increased," the Bank said.

"These developments could affect the outlook for financial stability in the United Kingdom if concerns about persistent low growth lead to a sudden reappraisal of underlying vulnerabilities in highly indebted economies, or if a shift in global risk appetite triggers sharp adjustments in financial markets and undermines business and household confidence."

If 2014 is anything to go on, 2015 will be quite the busy year.

Close

What's Hot