Oil. Russia. Interest rates. The United States. Europe. Commodities. China. Trade. Japan. The global economy enters 2015 with a lot on its mind, and a long list of competing storylines set to develop as the year progresses. Here, four notable economists share their views on the key issue that will grab their attention in 2015 – and how it might unfold, for better or worse.
Chief economist, RBC Global Asset Management – Toronto
Collapsing oil prices are poised to reverberate across 2015. If current pricing sticks, global producers will lose over a trillion dollars in annual profits, crimping their investment intentions and impairing their ability to pay dividends and debts.
Oil-exporting nations – Canada among them – naturally suffer, with the greatest agony reserved for emerging-market members who must perversely raise interest rates to halt capital flight and combat ballooning U.S.-denominated debt loads.
Desperate times lead to desperate measures, meaning Russia and the Middle East must be watched with an eagle eye next year.
However, let us not lose sight of the bigger picture. Oil's extreme dislocation should partially unwind in 2015. After all, oil supply outpaces demand by a mere 2 per cent. There is no need for extreme cutbacks, especially if demand grows as enthusiastically as our models indicate.
For that matter, the global economy actually likes low oil prices. For all of the bellyaching, every dollar lost by oil producers is more than recovered across a diffuse set of oil consumers. Indeed, the combination of low oil prices, low bond yields and weakening exchange rates should help revive the moribund European and Japanese economies. This could prove to be the most lasting consequence of oil's not-so-excellent adventure.
Chief global economist, Capital Economics – London
The year 2014 closed with a focus on the oil price, but developments in other commodity markets will also be worth watching in 2015. The knock-on effects could work in either direction.
We expect the price of oil to remain low. As energy is an important cost in the production and transportation of other commodities, this is one reason to expect price pressures more generally to be weak.
Nonetheless, most countries – and the world as a whole – should be better off as a result of lower oil prices, notably China and India. Of the advanced economies, Japan is the biggest winner, but there should also be sizable boosts to the U.S., euro zone and Britain. The upshot is that cheaper oil should support a rebound in the prices of industrial metals as economic activity picks up.
What's more, China and India are the two largest markets for gold. While inflation will be lower as a result of the fall in oil prices, global monetary policy is also likely to be looser for longer. We, therefore, expect base and precious metals prices to do well in 2015, improving the prospects for miners and the more diversified commodity economies.
Professor of economics, McGill University – Montreal
What should we expect from the world of central banking in 2015? I see two major forces.
First, given that real gross domestic product in the euro zone is still 2 per cent below the 2008 level, there's a pretty clear economic case for more fiscal and monetary stimulus. On the other hand, the political forces in opposition to such actions continue to be massive. My best guess for 2015 is that the euro zone will continue to muddle through, without much new stimulus of any kind.
Meanwhile, the United States is showing ever-more promising signs of an economic renaissance. The Federal Reserve's balance sheet has stopped its expansion, and most observers think that policy interest rates will begin their ascent in 2015. While such rate increases may wreak havoc on financial markets for a while, their existence will be a positive sign for the United States and for the world.
These different economic scenarios suggest that the U.S. dollar will be strengthening against the euro. How the Canadian dollar fares in such a situation is unclear, although the single best predictor for the Canadian dollar is still the path of world commodity prices – which is pretty much anybody's guess.
Chief economist, High Frequency Economics – Valhalla, N.Y.
My biggest worry for 2015 is of a default by Russia on its foreign debt. Vladimir Putin could intentionally renege on his foreign debt obligations – an Argentine approach – or Russia could just run out of liquid foreign-exchange assets. Russia owes $670-billion (U.S.) to foreigners. No one is sure who owns it all. Most of it likely is not in the hands of banks. We should remember that LTCM [Long-Term Capital Management] in the U.S. was not a bank, but its failure did a lot of damage to the financial system.
I am also waiting to see if an anti-austerity government comes to power in Greece and defaults on its debts to EFSF, the IMF and Euroland governments. EFSF has sold €180-billion ($254-billion Canadian) in bonds, backed largely by loans to Greece. In the worst case, banks and hedge funds owning these AAA bonds will find them downgraded. Some of them may fail. Euroland's governments may have to ante up real money to recapitalize EFSF, triggering a fiscal crisis.
Finally, I worry that Britain's current account deficit – at a record nearly 6 per cent of GDP – is wide enough to trigger a sterling crisis. The government has no strategy for external deficit reduction. A sterling crash would blow out inflation; the interest rate response would kill the economy.