The FINANCIAL — Standard Chartered Global Research expects global growth to improve in 2015, rising to 3.4% from 2.9% in 2014, but says that confidence is crucial and will require more than just better economic indicators to drive it. Standard Chartered believes that what John Maynard Keynes referred to as “animal spirits” – a spontaneous urge to action rather than inaction, and not the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities – are what the world economy lacks right now.
Although the world economy is improving, momentum is sluggish and animal spirits are fragile, especially in the West. This leads to two problems. First, unanticipated shocks (geopolitical or otherwise) can have bigger effects than in a stronger world economy. Second, policy can improve growth dynamics, but it can also be a significant source of risk. So far, the policy approach to boosting growth has taken the form of monetary easing. This will likely continue in 2015, according to Standard Chartered.
“2015 is likely to bring better growth and low inflation, which should be positive for financial markets. Stronger US growth and the resilience of emerging markets in Asia, Africa and the Middle East should provide support, but the absence of animal spirits is sobering. Confidence is needed for the recovery to gain momentum, and policy support will be essential to establishing this confidence. The risk of a policy mistake will be an important worry regarding 2015,” Marios Maratheftis, Head of Macro Research, said.
Standard Chartered expects the European Central Bank (ECB) and the People’s Bank of China (PBoC) to ease further, and the Bank of Japan (BoJ) to continue its quantitative easing programme. Although monetary easing can help, it has serious limitations, especially in countries where interest rates are already close to zero.
The Fed is likely to normalise policy in 2015 by hiking interest rates. This normalisation needs to be carefully timed and managed. Although we expect the US economy to grow faster, we think the growth recovery is long overdue. Premature tightening would risk derailing the US recovery, especially as there are currently no signs of inflation.
Growth in the US since mid-2009 has averaged only 2.3% – too low, given that the economy was emerging from a financial crisis and a recession that started at the end of 2007. We expect the US to finally break out in 2015, growing by 2.8%.
While we expect the euro-area economy to improve in 2015 compared with 2014, this needs to be put into context. The 11 largest euro-area economies grew an average of 0.3% during the Great Depression between 1929 and 1936 – better than the 0.2% contraction they averaged between 2007 and 2014. Real GDP per capita in the euro-area is now at 2006 levels, according to Standard Chartered.
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