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glen hodgson

It is now six years after the 2008-09 global financial crisis and recession, and the global economy is still out of balance. Feeble growth and inadequate structural reform in key regions, such as the European Union and Japan, have combined with fading growth prospects in emerging markets, and there are plenty of geopolitical risks.

On the positive side, a solid U.S. private sector recovery that is no longer dependent on "monetary morphine" (or quantitative easing) provides an important cornerstone for the global economy. Sharply lower oil prices are also making consumers everywhere feel a bit better, unlocking cash that can be spent on other goods and services.

All of this adds up to slightly better prospects in 2015, notably in North America, but the downside geopolitical risks from Ukraine to the Middle East need to be watched carefully.

Let's start with the struggling regions. The EU is again at risk of recession. Italy is already in recession, France is facing mediocre growth and the German recovery is being held back by the slowdown in its major trading partners. The U.K. is in better shape, but we think the consensus EU growth forecast of around 1.5 per cent in 2015 is too high. The European Central Bank is once again considering the prospect of quantitative easing to ensure that the euro zone does not slide into deflation.

Although the EU's fiscal and debt crisis has been stabilized, fundamental problems remain with excessive public sector debt and an unstable financial sector. Some have asserted that the EU's growth problems are due to fiscal austerity, but we think the real issue is a failure to address serious underlying structural problems, notably rigid labour markets that inhibit employment growth, especially for young people. Almost all EU countries need to undertake bold policy reform to foster an economic environment supportive of growth.

In Japan, the Abe government has succeeded in ending two decades of deflation, but its policy agenda is incomplete. Sales tax increases in 2014 raised prices, but also pushed the economy back into recession. Prime Minister Shinzo Abe has called an election in an effort to secure a clear mandate from voters to continue to implement structural reform. Whether he will get a strong mandate remains to be seen.

While major emerging markets will continue to outperform most industrial countries in 2015, they are not the sharp cutting edge of the global recovery. Recent performance has slipped and more active economic reform will be needed if the growth momentum is to be recaptured.

China is the bright spot among the BRICs and seems capable of sustaining growth of 7 per cent in 2015. In India and Mexico, reform-minded governments are engaging in serious talk about opening up key domestic markets and attracting foreign capital to underpin their growth ambitions. Other emerging markets, such as Indonesia, Vietnam and Ghana, are growing at a healthy clip.

However, Brazil's recent election did little to clarify its commitment to a growth-oriented agenda. Russia, meanwhile, is facing a collapsing currency, massive capital flight and flirting with recession, due both to the cost of economic sanctions and its own internal policy failings.

But there is also positive news in the 2015 outlook, largely from the United States. The U.S. private sector recovery is finally strong and sustainable, even as quantitative easing comes to an end. U.S. growth in the third quarter was just revised upward to an annualized rate of 3.9 per cent. Employment and consumer demand are in full recovery, with U.S. consumer confidence generally on the upswing since the spring. All of the data point to U.S. growth in excess of 3 per cent in 2015, which will help to tow along the economies of both Canada and Mexico through stronger demand for exports.

The other positive factor for global growth in 2015 is the 30-per-cent drop in oil prices this fall and the related international trade story. While oil producers and their governments, including those in Canada, will feel a negative revenue impact, consumers globally can redirect their spending away from oil and toward other goods and services, which will help to re-energize the overall economy. Global trade volumes had already rebounded in the third quarter, growing by more than 8 per cent on an annualized basis, which bodes well for the coming year.

All in all, the global economy in 2015 is expected to approach growth of 3.5 per cent, mildly better than the past three or four years. The star performers can be easily spotted, as can the laggards. Fortunately, the U.S. is the star performer with the ability to carry the rest of the world economy on its broad shoulders.

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.