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Flipping a coin on the global economy for 2015
January 15, 2015, 2:20 pm
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Year-ends and beginnings are prime time for economic pundits to come up with their ‘learned’ prognosis on the future of local, regional or global economies. But a view increasingly gaining ground is that as far as economic forecasts go, they carry only a slightly higher credibility than those made about the weather.

While the weather forecaster on evening news is a much-ridiculed figure, no one snorts in disdain when economic forecasts, made by highly paid ‘people in the know’, go awry and steers widely off predictions. Moreover, while even the most derided weatherman is unlikely to come up with something on the lines of, a “bright, sunny, cloudless day with quite a good chance for rain”, no one bats an eyelid when economic forecasters unabashedly comment that the “economic outlook remains bright, but there are considerable risks with the inevitable potential to dampen future prospects”. So should you take an umbrella when venturing out into the local and global economy in 2015; let’s find out what the wise men have to say. 

The consensus that emerges from the many forecasts on the global economy for 2015 is that it could be described as ‘possibly bright’; however, they all come with the qualifier that, ‘inevitably there are risks, some of them quite substantial, which could dampen any bright prospects for the economy.’

For example, The International Monetary Fund predicts global growth this year to be around 3.8 percent compared with 3.3 percent in 2014. But the world body warns that while this is the fastest growth since 2011, it is not boom-time yet.

We understand that there are always ‘buts’ with any economic forecast, but what has caused raised eyebrows are the few large ‘buts’, no pun intended, that are glaringly visible this time around.

One of the big ‘buts’ is the price of crude oil, which has fallen by over half from June 2014. While this might be seen as a boost for most of the world, countries whose economies rely mainly on oil revenues will struggle with their budgets. Russia is troubled by the fall of its rouble; with oil and gas accounting for 70 percent of export incomes, it is estimated that for every dollar fall in oil prices Russia loses about US$2 billion in revenues. Venezuela, another oil export dependent country, with the world’s largest known reserves of oil, is seeking international help to stem the impact of deepening recession.

Although Saudi Arabia needs oil prices to be around US$85 to break even in the longer term, it has deep pockets with a reserve fund of some $700 billion - so it can withstand lower prices for some time. Its decision, along with other main oil producers in the GCC, to maintain oil production at its current level, probably arises from the kingdom’s keenness to bring production discipline among its fellow OPEC members, and to also hopefully force some higher cost producers to shut down production. But most other OPEC members, including Iran, Iraq, Libya and Nigeria, with their greater budgetary demands have little room to maneuver and are already beginning to feel the impact of lower oil prices.

And then there is the Eurozone; the fall in oil prices have led to lower energy costs which in turn has tipped the euro-economy into deflation for the first time since 2009. This, together with the planned implementation of a stimulus package by the European Central Bank has pushed investors away from the euro and the currency has slid to its lowest level in nine years. The deflation in the Eurozone also increases the debt burden on nations such as Greece, where a snap election, slated for 25 January, is likely to bring in a left-wing government opposed to austerity measures. With uncertainty on whether a leftist government will stick to its international bail-out terms and continue in the Eurozone have led to jitters in other financially stressed countries in the bloc, inclduing Italy, Spain and even France.

The mainstay in most ‘favorable’ economic forecasts for 2015 was the strengthening US economy. The IMF reckons economic growth fueled by a stronger housing market, better employment figures and growing business investment suggests the economic rebound is becoming more sustainable in the US.

However, while this is good news for the US, it raises one of the big issues for the coming months. The continued recovery in the US means the country's central bank, the Federal Reserve, will probably raise its main interest rate, which has been close to zero for six years.

Higher interest rates would make American markets more attractive to investors, so funds could be pulled out of other countries especially emerging markets. The danger is that it might happen in a disruptive way that leads to sharp currency declines, higher inflation and rising borrowing costs for governments and business in developing countries.

A second important factor adding to the ‘bright’ prospects for 2015 was the continued growth, albeit at a lower speed, of the Chinese economy. But, the country's inevitable economic slowdown, both from from falling exports and lower investments, will present significant challenges not only to China, but also to the many countries that sell raw materials to the Chinese industry; especially the many African nations selling minerals to China are likely to suffer.

So, if there is one obvious conclusion that can be drawn from all the vacillating predictions of economic forecasters is that, 2015 will be yet another year of gradual post-crisis rehabilitation; prospects of any real growth in the global economy in the coming year will at best be dim. It appears that, their significant ‘buts’ notwithstanding, the forecasts by economic experts are nothing more than what the weatherman could have done with a flip of a coin.

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