Story Of The Week

World Economy in 2015

World economy, being such a vast area for exploration, we will hereby be shedding some light on few of the major economies and major problems faced by them in the past year, and what 2015 holds for them.

Let us start with one of the main topics- the epic collapse of oil prices. The drop in the oil price is providing a helping hand to revive the global economy. It gives consumers more money in hand and it cuts costs for businesses. There is a well established link between the cost of crude and the state of the world economy. Trevor Greetham, Director of Asset Allocation at Fidelity Solutions, said: “A low oil price is a stimulus for consumers. Global growth should pick up over 2015 and there are as yet few signs of the kind of inflation that would necessitate meaningful monetary tightening.” But the downfall is having a huge impact on the economies of Russia and Iran, who are selling oil at costs lower than the estimated production cost of $100 a barrel.

Another issue revolves around the Russian economy, which is expected to go into a deep freeze in 2015. The dramatic plunge in the ruble is an indication towards a declining economy. It all depends on the price of oil and how Vladimir Putin responds to it. It is feared that that it will set off a chain reaction across other emerging markets, especially its neighbouring countries. The budgets of major oil producers, from Venezuela to Indonesia to Texas, will be stretched.

China will play an important role in shaping the global economy in 2015. It won’t be wrong to call China one of the largest economies. However, the growth is expected to be lower this year because of the constraints on credit. This slowdown will affect exports to China and will affect countries like Germany, which exports machinery to the country. Also the exports from China are expected to be further cheaper, which can result in a deflation in the Eurozone, and the catastrophic effects of a deflation need not be explained. A sluggish Chinese economy in 2015 will compound the low oil price.

And while talking about global economy, how can US be missed! U.S. economy performed better than its counterparts in much of the rest of the world, with Europe and Japan facing stagnant growth and emerging markets slowing their once-gangbuster pace. A related factor was that the dollar appreciated compared with other currencies, so the dollars that U.S. companies made became relatively more valuable. The Federal Reserve will be playing a very important role here. Given we’re talking about the world’s largest economy, speculation on the first rate rise will have repercussions around the world. In December the Fed was saying that the rates would be kept constant for a considerable time but replaced the statement that it could be patient with the policy changes. However, if the economic data in the coming weeks and months continues to reflect a strengthening US economy, the Fed’s patience may wear thin. Expect market volatility when the central bank drops its cautious tone as it paves the way for the first rate rise since the great recession.

Finally one of the main reasons for the global slowdown is the Eurozone crises. The Euro failed to recover despite all its efforts in 2014. With growth of just 0.2% in the third quarter of 2014 and an annual inflation rate of 0.3% at last count in November, a threat of deflation looms over the Eurozone. Greece and Spain are already stuck in a deflationary rut and there is a concern that a dangerous deflationary spiral will spread to the rest of the regions. The fear is that as prices continue to fall, businesses and consumers will delay spending plans as they expect prices to fall further. With the backdrop of weak growth, low oil prices and general lack of inflationary pressures, the ECB’s battle against deflation will continue well into 2015. Many measures have been taken by the Central Bank and the government- like to encourage lending, the Central Bank charges money to keep the cash with itself. The only thing now which can be done is Quantitative Easing. Till now it was not done because of the opposition from Germany, but now it has to be done as more weak data from eurozone will make investors nervous and then there will be no coming back. The UK recovery depends on the Eurozone as it is Britain’s biggest trading partner.

The rest of the world along with India is enjoying the low oil prices as they are importers of oil. The low oil price is helping them lower their current account deficits; but the question remains for how long the oil manufacturing companies can sustain selling fuel at such a cost and can balance their books!

Overall the global economy is expected to go up in 2015, mainly because of the U.S. The IMF reckons that the economic growth is likely to be almost a full percentage point faster than 2013. It says a stronger housing market and business investment suggest the rebound is becoming more sustainable.

References-

  1. The Guardian

http://www.theguardian.com/business/2014/dec/28/five-issues-world-economy-2015

  1. BBC News

http://www.bbc.com/news/business-30633345

  1. The Economic Times

http://articles.economictimes.indiatimes.com/2015-01-02/news/57611644_1_oil-prices-global-economy-major-oil-producers

Advertisements

Categories: Story Of The Week