Global Markets

The global economy is likely to show improved growth in 2015, despite no shortage of gloomy headlines, according to Credit Suisse, with growth expectations and central banks likely to set the tone for sharemarkets.

This is even though China is slowing and Japan and Europe need significant stimulus to improve off a low base. But the investment bank says the headwind of lower energy prices will help global industrial production and goods demand lift by 3 to 5 per cent next year, led by the US, which should be able to post growth of at least 3 per cent. Combined with China reporting a growth rate in the high 6 per cent range, this should be enough to boost global gross domestic product growth to 3.4 per cent in 2015, compared with an expected 3.1 per cent in  2014.

“I’m surprised by the degree of negativity at the moment among investors and also policymakers,” says Robert Parker, senior adviser in the investment, strategy and research group, Credit Suisse. “The reason why I say I’m surprised is first of all, if you look at the United States, the economy data is actually very good. Whether you look at investment spending, consumer spending, export numbers, everything is consistent with 3 per cent-plus growth for the next 12 months in the US,”

The second plank in Parker’s positive case is that the negative perception of Europe is changing. “The reason for that is because a lot of stimulus is being thrown at the European economy at the moment. We are very confident that the European Central Bank will keep interest rates close to zero for at least two years. It is expanding its balance sheet from 2 trillion Euro ($3 trillion) to close to 3 trillion Euro probably by the second half of next year.”

Parker also expects to see “in the next month or two’ some easing in fiscal policy by Germany. “Germany is under intense pressure to ease fiscal policy. This is what’s changed, I think, in the last six months in Europe, is that policymakers have seen voters moving away from conventional centralist policies to either extreme left or extreme rights parties. That’s pushing the policymaker, both at the ECB and the ministries of finance, to adopt a much easier policy and really throw stimulus at the euro zone economy because we can’t tolerate the weakness in the economy that we’ve seen in the last six months” he says. Credit Suisse forecasts average real GDP growth of 1 per cent in the euro zone 2015.

Then there is China. “This year, China will grow at over 7 per cent but next year, China will probably grow somewhere just below 7 per cent. We’re looking at a gentle glide path downward in terms of the outlook for Chinese growth – but to a soft landing, nota hard landing,” Parker says.

As for Japan, which unexpectedly slipped into recession in the third quarter of 2014 while the poor third-quarter GDP number caused Credit Suisse to revise down its 2014 growth forecast form 0.9 per cent to 0.5 per cent, the postponement of the value-added tax hike planned for 2015, the continued aggressive monetary easing, as well as signs of the weak yen is finally beginning to boost exports, have induced the bank to lift its growth forecasts for both 2014*15 (up to 0.9 per cent) and 2015-16 (up 1.1 per cent).

Subsequent to that call, Japanese Prime Minister Shinzo Abe won a sweeping victory in the snap elections he called for December consolidating his power in the Diet and giving him a further mandate for deep reforms.

Parker says the growth outlook is being stimulated by the late-2014 fall in energy prices, which he describes as a “tax cut” for the world, although it is not good news for the budgets of producer nations such as Russia or Saudi Arabia. “It is a stimulus for some sectors that really matter, for example manufacturing, and the US household sector, which accounts for the bulk of US GDP.

“On the back of what we think is sustainable recovery in the US jobs market, there are positive feedback effects into credit growth, consumer confidence, and business confidence on the back of that,” Parker says. “Most importantly, gains in employment and wages and the resulting improvement in consumer spending are finally encouraging companies to raise investment spending.” And means the Federal Reserve can begin, at some stage in 2015, to normalise – that is, raise – interest rates. Credit Suisse expects this process to begin around midyear.

The Fed will act – cautiously – because the US unemployment rate and core inflation trend are both close to their expected long-run trend,” Parker says. The Bank of England will follow suit with tighter monetary policy, but easing will continue in Europe and Japan. “This is likely to result in both a weaker euro – and yen –  against the US dollar but, notwithstanding the concerns over ‘competitive devaluation’.”  Parker says currency weakness will boost the export earnings of Japan and Europe, particularly Germany, which has been hurt by both Chinese slowdown and its sanctions on Russia. “You cannot escape these linkages. Yes, the slowdown in China has had an impact on German exports, but not a shock impact. The point to make on German exports and particularly the capital goods producers like the car makers, is that as the euro comes down against the dollar, their profitability and profit margins are expanding very fast indeed. If we get further declines in the euro against the US dollar, which I think is inevitable, the profitability of German industry is going to be extremely positive,” Parker says.

While ECB governor Mario Draghi’s top priority is to eliminate deflation and risk, Parker says the ECB would like to see a much weaker euro. Credit Suisse is calling the euro at $US1.20 by the second quarter of 2015, against $US1.25 at present, after flirting with $US1.40 earlier in the year. “The point about that is that it’s simultaneously very good for offsetting deflation risk, and for export competitiveness,” he says.

For reasons of improved export competitiveness on currency weakness, Europe and Japan are Credit Suisse’s preferred equity markets in 2015. “Both are under-valued in terms of their fundamentals, and we expect both  to benefit from monetary policy and low commodity prices – especially for energy,” Parker says.

Article from James Dunn 20-26 December 2014