QUARTERLY ECONOMIC FORECAST
TD Economics
December 17, 2014
GLOBAL OUTLOOK: COUNTING ON AMERICA
Highlights
•
The theme of divergence continues to echo across the global economy. Economic activity has materially accelerated in America, but growth is sputtering in the euro zone and Japan, while the slowdown
continues in China.
•
As a result of weak demand outside North America, we have downgraded our expectations for the
global economy. We now anticipate global growth to decelerate from 3.3% in 2013 to 3.2% this year,
before edging up to 3.4% and 3.6% in 2015 and 2016, respectively.
•
Overall, the fall in oil prices will provide a lift to global growth. However, the gains will be uneven.
The world’s major economies, the U.S., euro zone, Japan and China stand to benefit, but several
emerging markets will see a steep fall in revenues.
• Emerging markets are beset by a number of issues and are likely to have another difficult year in
2015. Geopolitical issues, lower commodity prices, and tighter financial conditions will present challenges.
•
The subdued global backdrop, in addition to the decline in oil prices, suggests that disinflationary
pressures are unlikely to abate. Safe-haven government bond yields are likely to remain relatively
low, the U.S. dollar will remain strong and the upside to commodity prices will be limited.
Our last global economic forecast in September was titled “major economies marching to different
beats.” The story still rings true today. Economic growth is solid in North America, but the malaise
continues in the euro zone, Japan has entered a recession, and China is struggling to limit its economic
slowdown.
We continue to forecast a mild acceleration in global growth over the next two years, but the acceleration will likely not be as pronounced as we previously expected.
There is plenty of disappointment to go around when it comes
CHART 1. ECONOMIC GROWTH ACROSS REGIONS
to Europe, China and Japan. While in each case, policy has tried
to move the growth needle, these economies all suffer from debt 6.0 Real GDP, Y/Y % Chg.
5.5
5.3
overhangs and structural impediments that have proved hard nuts
5.1
5.0
to crack. From 3.3% growth in 2013, global real GDP is expected
2014
2015
2016
to slow to 3.2% this year, before edging up to 3.4% in 2015, and
4.0
3.6% in 2016.
3.0
2.7
2.6
Two elements that will be supportive of the acceleration are a 3.0
2.4 2.3
2.3
2.2
fall in oil prices, as well as a robust and resilient U.S. economy.
2.0
1.6
1.4
Lower oil prices create both winners and losers; however, in the
0.9 1.0
0.8 0.9
aggregate, it should be positive for global real GDP. The other 1.0
0.7
0.2
side of the coin is that lower oil prices also contribute to global
0.0
disinflationary pressures.
U.S.
Canada
Japan
Euro zone Asia exLatin
Japan
America*
As a result of modest global growth and low inflation, monSource: TD Economics. Forecast as at December 2014. *excludes Mexico.
etary policy is expected to remain accommodative, particularly
Craig Alexander, SVP & Chief Economist, 416-982-8064
Beata Caranci, VP & Deputy Chief Economist, 416-982-8067
Andrew Labelle, Economist, 416-982-2556
www.td.com/economics
@CraigA_TD
TD Economics | www.td.com/economics
in the euro zone and Japan, and to a lesser extent in China.
In contrast, policy is set to tighten somewhat in America,
with a first lift-off in the federal funds rate expected in the
second half of next year. The end result of these conflicting
forces is that the U.S. dollar is likely to appreciate further
and government bond yields in advanced economies will
remain relatively low.
North American outlook shines the brightest
In America, real GDP growth bounced back firmly from
the setback at the start of the year, averaging over 4.0% in the
second and third quarters of 2014 – the fastest two-quarter
pace of the recovery to date. The U.S. economic outlook
is marked by strengthening domestic fundamentals amidst
a difficult global environment. The economy has seen improvement across a range of indicators, but perhaps most
importantly in the labor market. Not only has the pace of job
growth accelerated to the fastest pace in over 15 years, but
job openings have reached new highs. Combined with a rise
in labor market turnover, this suggests that the recent uptrend
in wage growth is set to continue. Household income will
be further supported by the steep decline in energy prices
over the past three months.
The strength in U.S. domestic demand is balanced against
increased drag from the rest of the world. With the dollar
rising, U.S. exporters will face a more difficult environment,
and at least some of the additional domestic spending will
be imported from abroad. This will provide a much needed
lift to growth in the rest of the world, but also means that a
rising trade deficit will weigh on U.S. real GDP growth. All
told, following growth of 2.3% in 2014, we expect the U.S.
economy to grow by 3% in 2015, and to moderate to 2.7%
CHART 2. MOST AUSTERITY IN EURO ZERO
CAME TO AN END IN 2014.....
2.0
Across the pond, data in the U.K. has been positive, with
economic growth averaging 3% over the past six quarters.
Job growth has been notably buoyant over this period and
the labor market has tightened. This suggests that while wage
growth has been disappointing so far, a pick-up may be just
around the corner. Nonetheless, with a decelerating housing
market providing less of a fillip to domestic demand, and
given its exposure to a lackluster euro zone, U.K. growth is
likely to decelerate to a still healthy 2.4% next year.
In the euro zone, economic growth continues to disappoint. After growing by 0.2% annualized in the second
quarter, growth rose by a mildly stronger 0.6% in the third
quarter. Two core euro zone economies, France and Italy,
are of particular concern. In Italy, economic growth has been
negative for twelve of the past thirteen quarters. Meanwhile,
although France managed to eke out growth of 1.1% in the
108
Euro Real Effective Exchange Rate*, 2010=100
ECB cuts rates, announces
TLTRO + other measures
106
Government
austerity bites
1.0
Progress in the periphery, but core countries are a
source of weakness in Europe
CHART 3. ....BUT HIGHER EXCHANGE RATE WEIGHED,
SUBSEQUENT FALL WILL BE BENEFICIAL
Change in government discretionary fiscal support for economy*,
% of potential GDP
1.5
in 2016, as the economy moves closer to full employment.
To the north, the strong momentum in the Canadian
economy over the past two quarters is slated to continue
in the fourth. However, as a leading producer and exporter
of energy, the outlook has dimmed owing to the fall in oil
prices. At least in the near-term, lower commodity prices are
set to weigh on corporate profits and business investment.
These factors will be offset by continued healthy export
growth to the U.S., a further drop in the Canadian dollar to
a low of 84 U.S. cents, and the boost to purchasing power
from falling gasoline prices. All said, Canadian real GDP is
expected to clock in at a solid 2.4% in 2014 before slowing
to 2.3% in 2015, and 2.2% in 2016.
104
102
0.5
Draghi: "will do
whatever it takes"
100
0.0
98
-0.5
96
Fiscal support
for economy
-1.0
94
92
-1.5
90
-2.0
2010
2007
2008
2009
2010
2011
2012
2013
2014
Source: IMF. *as measured by the change in general government structural balance.
December 17, 2014
2011
2012
2013
2014
2015
Source: BIS. *Trade-weighted and adjusted for relative changes in consumer prices.
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third quarter, the two largest contributors were inventories
and government spending – not a strong foundation for
sustainable growth.
Fortunately, growth elsewhere in the euro zone has been
more buoyant. Some of the countries at the epicenter of the
euro crisis that have since undergone painful reforms, such
as Spain, Ireland and Greece, are now its strongest performers. However, a sustained period of stronger growth among
these countries will likely be dependent on more robust
activity in the monetary union’s core economies.
Meanwhile, German economic growth has been modest
in recent quarters. Weak business sentiment and a subdued
external backdrop have weighed materially on business
investment. Keeping the economy aloft are record low
unemployment and rising wages, which have spurred
household spending.
All told, the euro zone is expected to eke out modestly
stronger growth over the next two years. Growth will be
supported by diminished fiscal austerity, which severely
weighed on the economy in 2012 and 2013 (see Chart 2),
and by a declining euro, which should reverse the drag on
net exports (see Chart 3).
Slower growth, the new normal in East Asia
Further afield, economic activity in Japan has been
severely disappointing. After falling by a sharp 6.7% (annualized) in the second quarter following the consumption
tax hike, Japanese real GDP defied universal expectations
for a rebound, and fell by a further 1.9% in the third quarter. With inflation beginning to decline and with economic
growth failing to rebound, the Bank of Japan expanded its
qualitative and quantitative easing (QQE) program, leading
CHART 4. CHINA IS PLAGUED BY OVERCAPACITY
15.0
Y/Y % Chg.
Producer Price Index
Consumer Price Index
10.0
5.0
0.0
-5.0
-10.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: China National Bureau of Statistics.
December 17, 2014
to a surge in the Nikkei and a further tumbling in the value
of the yen.
Data in recent months has been slightly more positive
and suggests that Japan is likely to pull itself out of recession in the fourth quarter of 2014. In particular, moribund
real exports appear to finally be showing signs of life.
However, even if growth does turn positive, it will remain
modest. Negative real wage growth will remain a weight on
consumer spending. As the unemployment rate continues to
fall – especially amidst strong corporate profits – the hope
is that employees will be able to negotiate higher wages,
but at best, this will take several more quarters to occur. At
the very least, lower oil and gasoline prices will offer some
near-term relief to sliding wages.
Meanwhile, economic activity continues to slow in
China, with growth coming in at 7.3% in the third quarter,
the slowest pace since the financial crisis. Recent stimulus measures, including a $125bn liquidity injection into
its banks, interest rate cuts, and an easing in mortgage
regulations, have provided a modest lift to the decelerating
property sector. However, there are signs that the economic
slowdown has extended to other parts of the economy, with
motor vehicle sales rising 2.3% YoY in September, the
slowest pace in over two years . Overall, economic growth
is likely to come in at 7.4% for the year.
For next year, we expect China’s economy to decelerate
further to 7.0%, as Chinese economic activity continues to
slow towards a more sustainable rate of growth. As was the
case this year, China is likely to resort to further stimulatory measures in order to support its economy and temper
the slowdown.
Global economy strikes oil
One of the elements that will be supportive of stronger
global growth next year is the decline in oil prices. The fall in
prices has been driven both by rising oil supply, particularly
from the U.S. and selected other countries, and less global
incremental demand growth than expected, particularly in
emerging markets.
A fall in the price of oil is equivalent to a cash transfer
from oil producers to oil consumers. Our current forecast
is for Brent crude oil to average US$75 in 2015, a decline
of US$22 from our US$97 forecast in September. This is
equivalent to a cash transfer of more than US$700bn, or
roughly 0.9% of global GDP. Because oil consumers are
more likely to spend these additional funds than oil producers, and because their expenditures are likely to rise faster
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CHART 6. EMERGING MARKET BONDS AND CURRENCIES
FEELING THE BRUNT OF RECENT MARKET TURBULENCE
CHART 5. NET OIL EXPOSURE DIFFERS CONSIDERABLY
ACROSS LARGE EMERGING MARKETS
50%
Index
(Exports -Imports) as a % of GDP
Index of bond spreads
100
500
EM Currencies* (lhs)
40%
96
30%
EM Bond Index** (rhs)
450
92
400
88
350
0%
84
300
-10%
80
250
76
200
20%
10%
Thailand
South Afr.
India
Chile
Philipp.
Indonesia
China
Poland
Turkey
Brazil
Egypt
Argentina
Mexico
Malaysia
Colombia
Russia
Nigeria
Iran
UAE
Saudi A.
-20%
Source: UN Comtrade, TD Economics.
than those of oil producers are pared back, the impact on
global GDP is positive.
Model-based estimates vary on the exact impact of oilprice shocks. Most analyses are based on supply-driven
spikes in oil prices. For instance, in the last world economic
outlook, the IMF examined the impact of a 20% spike in
oil prices, and this was estimated to subtract 0.5 percentage
points from global growth. Because part of the recent fall
in oil prices has come as a result of diminished demand,
the decline is unlikely to cause as large an opposite positive response.
Although beneficial at a global level, lower oil prices
create both winners and losers. Many of the winners encompass larger economies or regions that can certainly use the
added boost to household and business pocketbooks – like
the euro zone, China and Japan. Although most advanced
economies are net importers of oil, this is not the case for
countries such as Canada and Norway. And, a number of
emerging market economies will lose out. The most prominent of these are OPEC members, as well as non-OPEC
oil producers, such as Russia (see Chart 5). In the case
of the latter, the drastic decline in the ruble tempers some
of the impact of the decline in oil, which is priced in US
dollars, but lower oil prices simply compound the already
significant difficulties facing the Russian economy. The
central bank recently implemented draconian interest rate
hikes in an attempt to defend the currency and stem capital
outflows. Early evidence suggests this decision was not met
with meaningful success. Russia’s troubles are complex,
but speak to the potential fiscal and economic strains that
emerging markets dependent on oil production will face in
December 17, 2014
Source: JP Morgan, Bloomberg. *JPM EM Currency Index,**JPM EMBI Global.
the coming year. Likewise, investors can expect ongoing
market volatility.
Bottom line
While the fall in oil prices will support global growth, the
outlook is still for a slow grind upward from the lackluster
pace of the past few years. Supporting the slim improvement in global economic growth is a robust U.S. economy
and lower oil prices. Lower energy costs should also mildly
boost activity in Japan and the euro zone.
Outside the U.S., global demand is likely to remain
relatively sluggish. In China, producer prices have been
negative on a year-over-year basis for 32 months in a row,
a sign of significant overcapacity relative to demand. Although deleveraging is on the verge of ending in the euro
zone, demand for credit remains very subdued. Monetary
policy will remain exceedingly accommodative in Europe
and Japan as both economies battle disinflation, with a large
likelihood of QE in the former.
Finally, emerging markets are beset by a host of issues,
including geopolitical challenges and declining commodity
prices. A strong US dollar and the potential for rate hikes
in the U.S. suggests that financial conditions are likely to
tighten for many developing economies, with heightened
episodes of currency and debt volatility. Emerging market
corporations with large foreign-denominated debt are a
particular risk.
The subdued global backdrop suggests that safe-haven
government bond yields are likely to remain relatively low,
the U.S. dollar will remain strong, and the upside to commodity prices will be limited.
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ECONOMIC INDICATORS FOR THE G-7 AND EUROPE
GLOBAL ECONOMIC OUTLOOK
Annual per cent change unless otherwise indicated
Real GDP
World
North America
United States
Canada
Mexico
European Union (EU-28)
Euro-zone (EU-17)
Germany
France
Italy
United Kingdom
EU accession members
Asia
Japan
Asian NIC's
Hong Kong
Korea
Singapore
Taiwan
Russia
Australia & New Zealand
Developing Asia
ASEAN-4
China
India**
Central/South America
Brazil
Other Developing
Other Advanced
2013 Share*
(%) 2013
99.9 3.3
20.0 2.1
16.5 2.2
1.5 2.0
2.0 1.1
17.2 0.2
12.3 -0.4
3.4 0.1
2.5 0.3
2.0 -1.9
2.3 1.7
2.7 1.4
41.3 5.2
4.6 1.5
3.4 2.8
0.4 2.9
1.7 3.0
0.4 3.9
1.0 2.1
3.4 1.3
1.2 2.4
28.7 6.6
4.6 5.2
15.8 7.7
6.6 4.7
6.7 3.2
3.0 2.5
13.7 3.5
1.0 1.9
2014
3.2
2.3
2.3
2.4
2.1
1.4
0.8
1.5
0.4
-0.4
3.0
2.3
4.9
0.2
3.3
2.0
3.5
3.1
3.5
0.4
2.8
6.4
4.6
7.4
5.4
0.7
0.1
2.9
1.8
Forecast
2015 2016
3.4
3.6
3.0
2.8
3.0
2.7
2.3
2.2
3.5
3.9
1.4
1.6
0.9
1.4
1.1
1.4
0.7
1.2
0.2
0.9
2.4
2.0
2.5
2.7
4.7
4.9
0.9
1.0
3.5
3.6
2.8
3.3
3.7
3.6
3.5
3.5
3.6
3.8
-3.5 -1.0
2.4
3.4
6.4
6.4
5.1
5.1
7.0
6.7
6.1
6.5
1.6
2.6
0.8
2.1
3.5
4.1
2.0
2.3
*Share of world GDP on a purchasing-power-parity basis.
Forecast as at December 2014. **Forecast for India refers to FY.
Source: IMF, TD Economics.
2013
2014
Forecast
2015
2016
Real GDP (Annual per cent change)
G-7 (32.7%)*
U.S.
Japan
EZ
Germany
France
Italy
United Kingdom
Canada
1.5
1.7
2.1
2.0
2.2
1.5
-0.5
0.1
0.4
-1.9
1.7
2.0
2.3
0.2
0.8
1.5
0.4
-0.4
3.0
2.4
3.0
0.9
0.9
1.1
0.7
0.2
2.4
2.3
2.7
1.0
1.4
1.4
1.2
0.9
2.0
2.2
Consumer Price Index (Annual per cent change)
G-7
U.S.
Japan
EZ
Germany
France
Italy
United Kingdom
Canada
1.3
1.6
1.1
1.8
1.5
0.4
1.3
1.6
1.0
1.3
2.6
0.9
1.6
2.8
0.5
0.8
0.6
0.2
1.5
2.0
1.1
1.4
0.7
0.9
0.8
0.4
1.2
1.5
2.2
1.1
1.2
1.7
1.3
1.1
1.9
2.1
Unemployment Rate (Per cent annual averages)
U.S.
Japan
EZ
Germany
France
Italy
United Kingdom
Canada
7.4
4.0
12.0
5.2
10.3
12.2
7.5
7.1
6.2
3.6
11.6
5.0
10.3
12.8
6.3
6.9
5.5
3.5
11.3
4.8
10.4
12.8
6.0
6.7
5.2
3.5
11.0
4.7
10.0
12.4
6.0
6.7
*Share of 2013 world gross domestic product (GDP)
Forecast as at December 2014
Source: National statistics agencies, TD Economics
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be
appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and
may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a
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Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to
be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future
economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent
risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities
that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report,
or for any loss or damage suffered.
December 17, 2014
5