Economic Update January 2015

There are an awful lot of moving parts influencing the world’s major economies at the moment.

Major disruptive influences are the recent sharp decline in oil prices, driven partly by the collapse of a speculative “bubble” but more fundamentally by the increase in production (the US is now a larger producer than Saudi by some measures.)

The second influence is the Euro instability – again – which has been a recurring theme for the last few years. The two shocks that are approaching are the introduction of quantitative easing by the European Central Bank and the likely election of the anti-austerity party, Syriza, in Greece. The fear is that such a result will lead to Grexit – or Greece leaving the Euro. If that were to happen, speculators would return to attacking the other peripheral economies with a view to profiting from their exit.

Adding to pressure on the Euro is the decision of the Swiss National Bank to remove its ill-advised support for the Euro last week, leading to one of the biggest swings in currency trading in the last few years. The SNB is now left nursing large losses on all the Euros it purchased since 2007, and may well need bailing out by the Swiss government.

The third level of pressure on the Euro comes from the speculation of a possible Brexit – Britain leaving the European Union – arising from the popularity of UKIP and the conservative decision to hold a referendum.

The fall in oil prices is good news for most economies, but bad news for those economies which are reliant upon oil (and gas) exports, such as Russia, Venezuela, Nigeria and many of the Middle Eastern countries. With the exception of Saudi Arabia and Norway, these economies do not have significant cash reserves to buffer them against the decline in exports. For Russia, the decline in the value of the Rouble has a minor counterbalancing effect as oil exports are priced in USD.

UK prospects are positive, with lower oil prices driving down inflation and reasonable growth in 2015/6. The potential negatives on the horizon are political – the failure of any party to gain a majority in the upcoming election, and the possibility of a further election in 2015 if a stable coalition cannot be created. It looks as though interest rates will remain at the current level throughout 2015 with a first increase in the second quarter of 2016. The big drag on the economy will be the failure of Europe to show any real growth, but any EU exit will be long drawn out. Growth rates of 3 to 3.5%.

European prospects are poor.  The only economy showing any signs of improvement is Germany, but the markets to the west are feeble and those to the east are in varying states of turmoil.

The Russian economy is a danger zone. Low value to the Rouble, declining oil earnings and sanctions suggest that the prices of food and necessities will continue to increase. Domestic unrest is possible, but unlikely to be effective given the authoritarian nature of the regime. Recession looks set to continue for the next 18-24 months.

China continues to grow, with some signs of consolidation slowing from the previous break-neck pace. Reform of the financial system and some reduction in the level of corruption suggest a very positive outcome over the next 3-5 years and growth rates of 5-7%.

The US looks to continue an a mini-boom as the full benefits of shale oil and gas feed through, but the pace of growth is likely to slow from the 5% recently recorded to around 4% in 2015.

Asia seems set for reasonable growth, supplying China with no major shocks foreseen. Different countries will move at different speeds, but Singapore, Vietnam, Malaysia and Indonesia all seem well set for growth in line with that in China. Thailand is at risk from the health of the elderly monarch and a succession – but if that transition is smooth or does not happen expect similar growth.

 

 

 

 

 

 

 

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