In 2014 countries from around the globe were each in their own unique position. Here is our economic update:
US monetary policy remains the number one driver of markets globally. The US economy is improving steadily but it is still in intensive care. In 2014 one of the life-support machines was turned off – ‘Quantitative Easing’, which is a fancy name for central bank buying of assets with newly printed money in the hope of creating inflation and depressing the currency. ‘QE’ achieved neither of these aims – inflation rates fell and the US dollar surged – but it did prevent deflation. A second life-support machine – trillion dollar budget deficits – is also being scaled back as tax revenues grow and welfare costs recede as the unemployment rate falls. But the third instrument utilised by the US is the one likely to keep investors awake at night in 2015 – zero interest rates. After much speculation and hinting, the Federal Reserve in December finally withdrew its promise to keep interest rates near zero ‘for a considerable time’, and replaced it with a statement that it will be ‘patient’ with rate hikes. The timing and pace of US rate hikes will probably be the dominant factor affecting global investment markets in 2015.
2014 was a year of slowing growth, falling housing prices but soaring share prices. The Chinese economy is heading for its slowest growth rate in 20 years, due to the continued decline of its dominant industry – housing construction – as a result of supply vastly outstripping demand. Falling prices have sent numerous property developers to the wall, threatening the opaque banking system. With consumer price inflation down to near 1% (the lowest in five years) and wholesale prices still falling for the past three years, the Chinese government has now joined the other big global economies in trying to use monetary policy, fiscal policy and a raft of reforms to try to stimulate lending, spending and growth. The biggest growth industry is now empty apartments – there are now around 4 million and growing by 30% per year. The government has had to become the ‘buyer of last resort’ – buying up empty apartment blocks from developers to use as social housing, hoping to stabilise prices and to prevent developer bankruptcies.
Europe & UK
In Europe, the UK recovered well in 2014 but the Eurozone stagnated, especially in the big three – Germany, France and Italy. Unemployment rates had been falling during 2013 but have stalled at around 11.5% across the Eurozone. Jobs growth is strong in Greece, Spain, Portugal and Ireland, but unemployment is on the rise again in Italy and France. Germany has been slowed by austerity measures, and its dogmatic refusal to use fiscal stimulus (deficit spending). France and Italy are slipping behind on their targets under the EU’s ‘Stability and Growth Pact’ to cut structural deficits by 0.5% per year until their budgets balance. 2015 will probably see the pendulum swing back again from German-led austerity toward stimulus spending championed by the IMF and ECB. The trigger for the next crisis will probably once again be Greece, which has missed bail-out conditions and targets. In December, Greek PM Samaras was forced to call an election for January after the Parliament failed three times to elect a President. The election saw the rise of the anti-austerity, anti-Euro Syriza party, which will probably get investors worrying once again about a possible break-up of the Euro or at least a Greek exit – the wonderfully named ‘Grexit’.