QUARTERLY ECONOMIC FORECAST
TD Economics
March 24, 2015
GLOBAL OUTLOOK: ADVANCED ECONOMIES TAKE
LEAD, CHALLENGES BUILD FOR EMERGING MARKETS
Highlights
•
Global economic growth disappointed last year. Lower oil prices and stimulus measures across
much of the world will help lead to a modest pickup this year. From 3.3% in 2014, we expect world
economic growth to accelerate to 3.5% in 2015 and 3.8% in 2016.
•
The improvement in economic growth will be entirely driven by advanced economies this year, as
emerging markets are facing a number of headwinds, compounded by a continued slowdown in
China. Russia and Brazil, in particular, are dealing with severe challenges. Emerging markets are
expected to provide more of a lift in 2016, as headwinds fade.
•
Among advanced economies, the forecast for U.S. growth has softened slightly, owing to another
weak start in the first quarter. In contrast, stimulus measures are starting to bear fruit in Europe,
where growth prospects have improved.
•
The European Central Bank and the Bank of Japan are continuing their quantitative easing programs, while the Federal Reserve is set to hike rates later this year. This suggests continued dollar
strength. Emerging market currencies have tumbled in the wake of this strength with more volatility
likely ahead.
Since the last forecast update in January, the global economy has performed largely as expected. As
a result, our forecast for economic growth remains unchanged1. From 3.3% growth in 2014, we expect
the world economy to accelerate to 3.5% in 2015 and 3.8% in 2016.
While the headline growth rate is unchanged, there has been
CHART 1. ECONOMIC GROWTH ACROSS REGIONS
movement among the parts. Within advanced economies, the
forecast for U.S. growth has softened slightly, offset by higher
Real GDP, Y/Y % Chg.
7.0
growth prospects in Europe. For emerging markets, the forecast for
5.8
5.7
5.4
India has been raised, but mainly due to methodological changes 6.0
2014
2015
2016
in their estimates of GDP. Finally, economic activity is expected 5.0
to soften even more in Brazil, owing to a deteriorating fiscal situ- 4.0
3
ation, tightening monetary policy, and a severe drought.
2.8
3.0
2.5
2.4
2.1 2.2
1.9
A number of the key downside risks facing the global economy
1.8
1.6
2.0
1.4
have somewhat dissipated over the past month. After several weeks
0.9
0.9
0.8
0.6
of acrimonious negotiations, Greece has secured a four-month 1.0
extension of its bailout program. While an immediate crisis has 0.0
-0.1
been averted, specific reform details in Greece still need to be -1.0
U.S.
Canada
Japan
Euro zone Asia exLatin
agreed upon for the final bailout funds to be disbursed, so risks
Japan
America*
remain. Secondly, the precipitous decline in the price of oil has Source: TD Economics. Forecast as at March 2015. *excludes Mexico.
been partially arrested. The supply-driven fall in prices is beneficial
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
for the global economy, but the speed of decline increased
market jitters regarding the default risk of oil producers in
both sovereign and corporate debt markets. Oil prices have
fluctuated in recent weeks, but appear to be nearing a bottom.
All told, the improvement in global growth will come
from advanced economies where we expect growth to rise
from 1.8% in 2014 to 2.2% this year, and further to 2.4%
next year. In contrast, 2015 is likely to be another challenging year for emerging markets (EM), with several large
EMs beset by idiosyncratic headwinds, compounded by a
further slowdown in Chinese growth. Relative to last year,
economic growth in developing economies will be little
changed at 4.4% in 2015. But, a more noticeable rebound
to 4.8% should materialize in 2016, as headwinds abate.
Euro area economic recovery finally gaining some
traction
In what has become a recurring pattern, 2014 was another
disappointing year for the euro area economy. Economic
growth decelerated materially from the end of 2013 through
the middle of the year. Nonetheless, there are several reasons
for optimism in 2015.
For one, the fall in the euro – owing to monetary policy
easing by the ECB and the prospect of higher interest rates
in America – will provide a helping hand to net exports. As
recently as May of last year, the euro was flirting with 1.40
USD to the euro. It has since fallen to under 1.10 USD and is
expected to breach parity later this year. On a trade-weighted
basis, the decline in the euro has been milder, falling 13.4%
since May 2014. Nearly half of the weakness has been due
to a depreciation versus the USD, pointing to significant
depreciation relative to other currencies as well.
CHART 2. END TO EURO AREA DELEVERAGING
TO BE SUPPORTIVE OF GROWTH
Y/Y % Chg.
Debt to GDP, %
180%
14
12
170%
10
160%
8
6
150%
4
140%
2
Other positive developments will also help boost growth.
The fall in oil prices is a boon to the euro area economy,
as it is a large consumer and has little dependence on
production. The difference between how much oil it consumes and how much it produces is 40% greater than that
in the United States. In addition, bond yields have fallen
significantly, allowing firms with access to capital markets
to source cheap funding, while reducing interest costs for
governments. There is also evidence of a turn in the credit
cycle, with bank loans to the private sector having risen on
a year-over-year basis for two consecutive months, a first
since 2012 (see Chart 2).
Recent data corroborates this pickup in activity. Real
GDP in the euro area surprised to the upside in the fourth
quarter, growing by 1.3% annualized. Purchasing manager’s
indexes show that this improvement is slated to continue in
the first quarter of this year, with the composite PMI having
risen over the past three consecutive months, reaching 53.3
in February. Overall, economic growth in the euro area is
expected to pick up from 0.9% last year to 1.4% this year
and 1.8% in 2016.
Stronger growth will help to raise inflation, which remains very weak. At 0.7% year-over-year in February, core
inflation is very subdued, while headline inflation picked up
from -0.6% in January to a still very low -0.3% in February.
In the near term, headline inflation will be driven by the evolution in oil prices; however, by mid-year, stronger economic
growth, a lower euro and stabilizing oil prices should pull
inflation into positive territory on a year-over-year basis.
A pickup in activity in the euro area – the UK’s largest
trading partner – should provide a lift to its neighbor across
the Channel in 2015. Real GDP growth was 2.6% in 2014 –
the fastest among G7 economies – and is expected to grow
by 2.8% this year before decelerating back to 2.6% in 2016.
While a slowing housing market will weigh on economic
growth, consumption should remain robust as a tightening
labor market delivers stronger wage growth. Real incomes
will be further boosted by the fall in oil prices. The UK
economy does face some medium-term challenges, however, as the recovery-to-date has been overly dependent on
domestic demand. As a result, the current account deficit
reached a record 6% of GDP in Q3 2014.
0
130%
Non-Financial Private Sector Debt (rhs)
-2
Bank Loans to Non-Financial Private Sector
-4
1999
2001
2003
Source: BIS, ECB.
March 24, 2015
2005
2007
2009
2011
2013
120%
2015
Other advanced economies to see growth pick up
Japan is also expected to see an improvement in economic activity. Last year was a difficult one for the Japanese
economy, due to a more severe-than-expected drag from the
2
TD Economics | www.td.com/economics
consumption tax hike in April 2014. Overall, the economy
contracted by 0.1% in 2014. Although the economy is expected to grow by only 0.9% (on an annual average basis)
this year, this reflects a weak hand-off from 2014 and average quarterly growth will be stronger than the impression
left by the annual figure. By 2016, economic growth should
accelerate further to 1.7%.
Net exports are benefitting from the fall in the yen,
positively contributing to overall GDP growth over the past
two quarters. However, weakness in domestic demand has
been holding back growth, as the consumption tax hike
hurts real incomes – real wage growth remains negative at
-1.5% year-on-year.
The good news is that basic pay (scheduled cash earnings) grew at 0.8% year-over-year in nominal terms in January, which is the largest gain since January 2000 (See Chart
3). Meanwhile, annual spring wage negotiations are pointing
towards higher base wages in 2015. With inflation expected
to fall to just above 0%, this points to positive real wage
gains later this year, which will be supportive of domestic
demand. All told, while net exports are expected to do most
of the heavy lifting for economic growth early in the year,
there is hope for more broad-based growth later in 2015.
Finally, one of the underpinnings for stronger global
growth this year is undoubtedly the United States. While
the weather is once again leading to downward revisions to
growth estimates for the first quarter, the economic foundation remains intact. The acceleration in job growth is the
fastest in 15 years, and small and medium sized businesses
are increasingly expecting to raise wages. Meanwhile, inflation has fallen due to the decline in energy prices and a sky
rocketing U.S. dollar. The result of a buoyant job market
Advanced economy commodity exporters will face
greater challenges
Both Australia and Canada have had strong economic
performances in recent years relative to other advanced
economies; however, both are expected to see more moderate economic growth this year. The decline in prices of key
commodity exports, iron and oil, respectively, will weigh
on real GDP. That being said, lower interest rates, currencies and energy savings to consumers will provide a partial
offset to both economies. Canada should also benefit from
robust activity in its key U.S. export market. Going into next
year, both countries should see stronger growth, as oil prices
enjoy a lift and exports pick up in Canada, while substantial
LNG production will come online in Australia.
Emerging markets face another challenging year
In contrast to generally positive sentiment in advanced
economies, the mood is gloomier around three of the
world’s four largest emerging markets – China, Brazil, and
Russia. Firstly, China’s slowdown continues with negative
ramifications on commodity exporters and neighboring
trading partners (see here for more). For 2015 and 2016,
CHART 4. POOR START TO THE YEAR IN CHINA,
ESPECIALLY IN REAL ESTATE, POINTS TO THE NEED FOR
MORE STIMULUS OR RISK GREATER SLOWDOWN
CHART 3. TIGHT LABOR MARKET AND ABENOMICS
LEADING TO STRONGER NOMINAL WAGE GROWTH
%, 6mth MA
and falling consumer inflation is robust gains in real disposable income. This bodes well for strengthening consumer
spending. Despite the anticipated drag from international
trade, the acceleration in domestic spending will fuel a rise
in overall economic growth. All told, the U.S. economy is
likely to grow by 3.0% in 2015, before slowing marginally
to 2.6% in 2016. The American consumer and their high
propensity to import will provide a much-needed lift to the
rest of the world.
Y/Y % Chg., 12mth MA
3
6.0
5.5
2
5.0
50
Y/Y % Chg., February YTD
40
30
1
4.5
20
0
4.0
10
0
3.5
-1
-10
3.0
Unemployment Rate (lhs)
2.5
-2
Growth in Scheduled Cash Earnings (rhs)
2.0
-3
Source: Ministry of Health, Labour and Welfare (Japan).
March 24, 2015
-20
2010
2011
2012
2013
2014
2015
-30
Real Estate New real estate
Sales
construction
New Home
Prices*
Industrial
Production
Retail Sales
Source: China National Bureau of Statistics. *Home Price data is for February only.
3
TD Economics | www.td.com/economics
we lowered our forecast of Chinese economic growth from
7.0% to 6.9% and from 6.7% to 6.5%, respectively. Chinese
authorities appear ready to accept lower growth in order to
reduce the country’s dependence on credit-fuelled investment, while also aiming for other goals, such as a cleaner
environmental policy.
Recently released data shows that the pace of credit
growth in the non-financial private sector as a share of GDP
in the third quarter was the slowest it has been in almost
three years, pointing to a possible stabilization in China’s
debt. However, newly-started real estate construction was
down 17.7% Y/Y in terms of floor space over the first two
months of the year, and new home prices continue to decline (see Chart 4). This suggests that more monetary and
fiscal stimulus will likely be necessary in order to prevent
a sharper slowdown in both the housing market and the
broader economy.
While China’s economy is slowing, it will at least maintain a relatively lofty level of growth. The same cannot be
said for Russia and Brazil. Russia is facing strong twin
headwinds in the form of lower oil prices and economic
sanctions. As a result, a sharp contraction in activity is
expected this year. The country’s near-term prospects will
be largely determined by the evolution of the conflict in the
Ukraine, political relations with the west and oil prices, but
it is likely to remain in recession next year as well.
Meanwhile, Brazil is expected to spend the year in
recession and eke out only very modest growth in 2016.
Deteriorating government revenues and rising expenditures
blew a hole open in Brazil’s budget last year. The overall
CHART 5. EASTERN EUROPEAN AND LATIN AMERICAN
CURRENCIES FARING WORSE.
2.5
0.0
-2.5
-5.0
-7.5
-10.0
EM ASIA
-12.5
-15.0
-17.5
EMEA
LatAm
-20.0
-22.5
% Chg. in Currency vs USD
Dark Bars: Taper Tantrum 2013
Light Bars: Past four months
Source: Bloomberg. Fragile Five: Indonesia, India, Brazil, South Africa, Turkey.
general government deficit more than doubled to 6.7% of
GDP, while the primary surplus went from +1.9% of GDP
in 2013 to -0.6% last year – the first primary deficit since
1997. Compounding the difficult fiscal situation is the fact
that parts of the country are facing severe drought, leading
to electricity and water rationing, while a corruption scandal
surrounding national oil champion Petrobras is undermining confidence. To make matters worse, tariff increases are
keeping inflation sharply above target, with monetary policy
particularly tight as a result. The situation has led to a steep
drop in the Brazilian real.
Brazil is not alone in experiencing currency volatility.
Across seventeen of the largest emerging markets without
a currency peg, the tumble in currencies has been greater
over the past four months than during the taper tantrum
MONETARY POLICY HAS BEEN ALMOST ALL ONE-WAY OUTSIDE RUSSIAN VICINITY
Central Banks rate/QE changes since December
.....Easing Policy
Emerging Markets
Morocco
Jordan
.....Tightening Policy
Advanced
All
Iceland
Brazil
Uzbekistan
China
Norway
Russia
Romania
Indonesia
Denmark
Armenia
India
Botswana
Canada
Ukraine
Egypt
Poland
Australia
Belarus
Peru
Serbia
Sweden
Georgia
Mongolia
Turkey
Costa Rica
Euro Area
Pakistan
Honduras
Israel
Albania
Thailand
S. Korea
Switzerland
Source: TD Economics.
Note: Excludes direct currency intervention/devaluations, as zero-sum for the world as a whole.
March 24, 2015
4
TD Economics | www.td.com/economics
in 20132 (see Chart 5). The decline in currencies has been
caused by a combination of the prospect of higher U.S. interest rates, volatile oil prices, and weak domestic economic
performances.
During the last taper tantrum, some of the worst-affected
economies were the “Fragile Five” – Indonesia, India, Brazil, South Africa, Turkey. These countries had large twin
deficits, both in their fiscal and current accounts. This time
around, two members of the Fragile Five are no longer so
fragile due to improved economic fundamentals. India
and Indonesia have introduced reforms and benefited from
the fall in oil prices. Generally speaking, over the past four
months, Asian currencies have outperformed, while EMEA
– Europe, Middle East, and Africa – and Latin American currencies have performed worse. Eastern European currencies
have fallen alongside the euro, while depreciation in Latin
American currencies reflects weakness in Brazil and lower
oil prices weighing on the Mexican and Colombian pesos.
Risks in emerging markets are not necessarily all onesided. Net oil importers will benefit from lower oil prices,
while the energy-driven fall in inflation has allowed a
number of countries to loosen monetary policy in an effort
to spur economic growth (see Table).
In the EM world, India continues to stand out as the only
one of the top four emerging markets likely to see stronger
growth this year. The country recently made methodological
changes in the way it calculates GDP, including rebasing
the real GDP series from 2004-05 to 2011-12. This led to
a large upward revision in economic growth for FY20143
from 4.7% to 6.9%. While the higher growth rate comes
as a surprise, and does raise some skepticism, it suggests
that India’s economic growth rate is set to surpass China’s
this year.
Bottom Line
Global economic growth appears set to modestly accelerate this year, the first such pickup since the financial crisis.
The acceleration will be led by the U.S., euro area and Japan. In contrast, emerging markets as a whole will struggle,
weighed down by a slowing China and idiosyncratic headwinds facing some of the large countries. The risks lie in
a greater-than-expected slowdown in China, and increased
volatility and capital outflows within emerging markets,
as the Federal Reserve nears its first rate hike. However,
financial markets are largely anticipating the commencement
of a rate hike cycle from the Federal Reserve, so our hope is
that any potential outflow in capital from emerging markets
won’t be too abrupt or disruptive to the global economy.
Endnotes
1. After adjusting for GDP changes in India, as a result of methodological changes, including a shift in base year.
2. Between early May and early September 2013. The Chairman of the U.S. Federal Reserve first discussed potential tapering of asset purchases on
May 21st 2013. In September of that same year, in a widely unanticipated move, the central bank decided not to begin tapering their asset purchases,
which led to a rebound in EM currencies.
3. April 2013 to March 2014.
March 24, 2015
5
TD Economics | www.td.com/economics
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 3.4
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 5.5
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 7.0
4.6 5.2
15.8 7.7
6.6 6.9
6.7 3.2
3.0 2.5
13.7 3.5
1.0 1.9
2014
3.3
2.4
2.4
2.5
2.1
1.4
0.9
1.6
0.4
-0.4
2.6
2.5
5.2
-0.1
3.3
2.3
3.4
2.9
3.7
0.5
2.8
6.9
4.4
7.4
7.4
0.8
0.1
3.0
2.3
*Share of world GDP on a purchasing-power-parity basis.
Forecast as at March 2015. **Forecast for India refers to FY.
Source: IMF, TD Economics.
Forecast
2015 2016
3.5
3.8
2.9
2.9
3.0
2.8
1.9
2.2
3.1
3.6
1.8
2.1
1.4
1.8
1.7
1.7
1.0
1.5
0.4
1.2
2.8
2.5
2.8
3.0
4.9
5.2
0.9
1.6
3.5
3.5
2.8
3.1
3.5
3.5
3.3
3.3
3.8
3.6
-4.5 -1.0
2.4
3.4
7.0
6.8
5.2
5.4
6.9
6.5
8.3
8.7
0.6
1.9
-0.4
0.5
3.5
4.0
2.0
2.3
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
2.2
2.3
2.2
1.6
-0.5
0.1
0.4
-1.7
1.7
2.0
2.4
-0.1
0.9
1.6
0.4
-0.4
2.6
2.5
3.0
0.9
1.4
1.7
1.0
0.4
2.8
1.9
2.8
1.6
1.8
1.7
1.5
1.2
2.5
2.2
Consumer Price Index (Annual per cent change)
G-7
U.S.
Japan
EZ
Germany
France
Italy
United Kingdom
Canada
1.3
1.5
0.4
2.1
1.5
0.4
1.3
1.6
1.0
1.3
2.6
0.9
1.6
2.7
0.4
0.8
0.6
0.2
1.5
1.9
0.3
0.7
0.0
0.5
0.4
0.3
0.3
0.4
2.6
1.1
1.4
1.8
1.6
1.4
1.8
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
7.6
7.1
6.2
3.6
11.6
5.0
10.2
12.7
6.2
6.9
5.3
3.5
11.1
4.7
10.1
12.5
5.4
6.8
5.0
3.4
10.6
4.5
9.9
12.1
5.1
6.8
*Share of 2013 world gross domestic product (GDP)
Forecast as at March 2015
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
solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide
material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD
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.
March 24, 2015
6