Mark Mcfarland, global chief economist for Coutts, shares insights on market behaviour and economic growth for 2014/2015
Coutts outlook for the year 2014/2015 is positive. There is little sign of inflation or a need to quickly raise interest rates, and the global recovery appears to be becoming more widespread. Meanwhile, emerging markets can compensate for weaknesses in developed markets where government debt levels have doubled since 2008.
In economic terms, the outlook favours North America and Asia Pacific. The US is where banking restructuring is at the most advanced stage among developed nations, while Asia Pacific is the group of countries that is likely to benefit most from a revival in international trade driven by consumers in the US and in China.
Growth and policy making will be as important in 2015 as economic recovery. Growth in the US and Europe has been weak since 2008, particularly when compared with historical levels. Companies have yet to show enough confidence in the future to start investing in people and machinery again.
And while the US equity market has powered through record highs and business surveys are very optimistic, the level of unemployment is still very high. In fact it is over 10 per cent of the US labour force, if all the people who have given up looking for work are considered. The European recovery has been even less convincing, for the same reasons. Both have relied heavily on low interest rates and quantitative easing, where central banks buy newly issued government bonds to keep interest rates low and offer cheap funding to banks and corporates.
Europe, in particular, has a very rigid political system that makes deep reform hard. For this reason, most of the opportunities are outside Europe.
Outside the developed nations, two themes will be hugely important over the next 18 months. Firstly, the return of US dollar interest rates to a more normal level could have a big impact on markets in 2015, but we believe that it will be less than is feared. In 2013, the then chairman of the Federal Reserve, Ben Bernanke, only had to give the impression that the US central bank was thinking of starting that journey before markets and economies were hit.
Geopolitical risk also will have a very significant role in shaping events throughout markets outside the G7. Resolution of the crisis in Ukraine will have a very large effect on how developed markets deal and trade with OPEC’S largest oil producer.
Political relations between the US and Iran could evolve much more peacefully to the benefit of the Middle East and southern Europe particularly. Elections in Brazil and Argentina will direct the forces of economic reform in Latin America. There is potential in each of these cases.
In Asia, India’s movement away from socialism towards more market-driven reforms, Japan’s shaky attempts to implement economic reforms, China’s reforms and anticorruption drive, and a pick up in global trade will have a big impact on growth in the region. Trade and international finance are intricately linked in markets with large export sectors. The improved US outlook should mean that banks will be more willing to lend to Asia’s exporters. That’s good for growth around the region.