RaboResearch - Economic Research

Dit artikel is ook beschikbaar in het Nederlands

Global economic outlook: geopolitics back with a vengeance

Economic Quarterly Report

  • Very gradual global economic recovery to continue in 2014 and 2015
  • Accelerating growth industrialised countries
  • Downside risks in the form of geopolitical tensions have increased
  • Conflict in East Ukraine will mainly affect the European economy
  • Developments in Libya and Iran could lead to higher oil prices

Prospects for the global economy, by Hans Stegeman


The very gradual recovery in the global economy is expected to continue this year and next. We note however that the downside geopolitical risks have significantly increased in recent months. The effect of the conflict in East Ukraine could be felt mainly in the European economy, however there are several other geopolitical tensions that could affect the global economy through slower growth in world trade or higher oil prices. Once again, this shows how fragile the global economic recovery is.

Industrialised countries take up the challenge

The recovery in the global economy is expected to gradually gain momentum during the rest of this year and next year. Growth in 2014 and 2015 is forecast to be slightly higher than the 3.2% GDP volume growth seen last year. This would appear to contradict the somewhat disappointing global figures in the first half of this year. Both global industrial production and world trade in the first six months were down on the figures seen in the latter months of last year (see figures 1 and 2). However, this was due to temporary negative factors, including the very hard winter in the US. The recovery will most likely gain strength in the second half of this year, in both the industrialised countries and the emerging markets.

On balance, we expect next year’s economic growth in the industrialised economies to be slightly higher than in 2014. There is still a two-track recovery in the industrialised world, with the difference between the accelerating economies in the US and the UK and the stuttering economy in the eurozone becoming increasingly evident. In both the US and the UK, the recovery in the housing market will most likely continue to be supported by low interest rates, while the outlook in the labour market will also continue to improve. Especially in the US, we expect to see a clear acceleration in growth in 2015 compared to this year. This contrasts sharply with the weak recovery in the eurozone, which will probably still feature high unemployment and low inflation both this year and next. The potential for and readiness to implement further budgetary and monetary accommodation in the eurozone is very limited.

Since last year, the Japanese economy has been following its own dynamic which is highly dependent on a stimulatory policy, also known as Abenomics. This dependence is underlined by the negative effect of the VAT increase on the disappointing GDP figures in the second quarter of this year. Doubts regarding the effectiveness of Abenomics in the long term have only increased, especially since the ‘third pillar’ of policy (structural reforms) has not yet really got going.

Figure 1: Weak 14H1 world trade
Figure 1: Weak 14H1 world tradeSource: Macrobond
Figure 2: Slowing growth in production
Figure 2: Slowing growth in productionSource: Macrobond

The expectation of accelerating economic growth in the industrialised countries appears to apply to a lesser extent to most emerging countries. The role of the Asian growth markets here is crucial. This region is estimated to represent 27% of global GDP in 2014, measured in terms of purchasing power parity (figure 3). The emerging Asian countries, which depend heavily on growth in China, have benefited from the recent stimulatory measures in China in the form of investments in railways and home building. Looking ahead however, we think growth in China will slow to some extent, partly because the housing market is continuing to weaken gradually. The other emerging markets are also not likely to develop any substantial pick-up in growth next year. The exceptions will be countries that can benefit significantly from the US recovery, such as Mexico. Nonetheless, it will still be the emerging markets that will provide by far the greatest contribution (around three-quarters) to global economic growth this and next year.

Figure 3: Asia’s contribution to growth continues to increase
Figure 3: Asia’s contribution to growth continues to increaseSource: Reuters EcoWin, Rabobank

Geopolitical risks: East Ukraine

In our base scenario, the macroeconomic effect of the current conflict in East Ukraine on both the global and the European economy will remain limited. While the global economy is gradually picking up, at the same time we can see that the downside risks have increased in recent months, mainly in geopolitical terms. This paragraph looks at the impact of the conflict in East Ukraine, after which the following paragraph describes the effect of possibly higher oil prices due to tensions in the various oil-producing countries.

Regarding East Ukraine, we make a distinction between the expected effects of the current state of affairs and the possible additional effects if the situation escalates. The first point in the current situation concerns the direct effects of mutual trade sanctions. These mainly affect the European Union (EU), since it is Russia’s largest trading partner by far, accounting for 42% of Russian goods imports in 2012. Within the EU, the situation varies widely in each country and each sector. Figure 4 shows that it will mainly be the Baltic states, Finland and to a lesser extent Poland that will suffer from the sanctions on agricultural products. However, the total direct effect of sanctions on the European economy will in our estimation be limited. Exports of agricultural products to Russia in 2013 amounted to only 0.18% of goods exported by the EU-28 as a whole. There are however indirect effects as well. Firstly, there will be secondary effects because the trade flows of agricultural products will be shifted from Russia to the European market. Secondly, we have to consider the impact of a deterioration in consumer and producer confidence in Europe, the first evidence of which appeared in the weaker Economic Sentiment Indicator survey by the EC released in August.

Figure 4: Impact of trade sanctions
Figure 4: Impact of trade sanctionsSource: Eurostat, Rabobank

The risks that the current situation will deteriorate have however increased. Tighter sanctions as a result of an escalation of the conflict in East Ukraine could have a much greater effect on European exports. That said, Russia is not likely to impose import restrictions on goods and services that are essential to the Russian economy. While the effect of an escalation in trade measures will be noticeable in global terms, our view is that this will still be felt most keenly in Europe. In the unfortunate event of a military escalation, the effect on confidence will be felt in the real economy and the financial markets, both in the EU and elsewhere. Worsening global economic sentiment could also harm the growth of world trade: the effects of this are described in box 1. In the financial markets, capital market interest rates will fall further as a result of higher demand for safe government bonds and stock prices will fall further.

Box 1: World trade shock

One risk to this estimate is that international tensions, including the conflict in East Ukraine, could lead to a weaker economic climate around the world and thus lower growth in world trade. A calculation using the macroeconomic model NiGEM offers an indication of what would happen if world trade growth were to halve in comparison to our central tendency in the second half of this year and in 2015. An important assumption is that no accommodative fiscal or monetary policy measures would be introduced in response to lower world trade growth.

Table 1: Results of the world trade shock
Table 1: Results of the world trade shockSource: NiGEM, Rabobank

Table 1 shows that the effect of a shock to world trade on the figures for 2014 would be negligible. This is not surprising, since the effects in the last two quarters of this year have little effect on the annual figure for 2014. In 2015 we see that global economic growth would be down by 0.5%-point compared to the base scenario. The negative impact is more or less similar in most of the major economies, although a decline of 0.6%-point in growth in the eurozone will be felt more acutely than a decline of 0.5%-point in growth in China, due to the lower growth rate in the former region. Only the US, with its large and relatively closed economy, will be less affected by lower growth in world trade.

More geopolitics: tensions affecting oil production

The potential for higher oil prices is another risk. While the conflict in East Ukraine is attracting much attention, there are several other geopolitical risks that could harm the global economy. Since a number of conflict situations and unstable governments are concentrated in oil-producing countries, this paragraph looks at the consequences of rising oil prices in response to an unwelcome escalation of these conflicts. Actually, the international conflicts that have recently attracted much media attention, such as the stalemate in East Ukraine and the advance of IS in Iraq, do not represent the most important direct threat to oil prices. There is a very strong disincentive for both Russia and Europe against imposing trade restrictions on Russian oil and gas exports. In the case of Iraq, the volume of oil production in the northern part of Iraq controlled by IS is too low to significantly affect global prices. However, this is not the case for oil production and exports from Libya and Iran, according to the political analysis firm Eurasia and the International Energy Agency (2014). In Libya, continuing political instability threatens the cautious resumption of oil exports earlier this year. In Iran, the outcome of negotiations with the US regarding Iran’s nuclear programme is of crucial importance in determining whether restrictions on exports of Iranian oil are removed or indeed tightened. While not foreseen in the base scenario, a failure of these negotiations would constitute a major risk of higher oil prices. Box 2 shows the global impact of a scenario involving higher oil prices.

Box 2: Oil price shock

We have studied the economic effects of higher oil prices by calculating a scenario with the economic model NiGEM. This involves an increase in the oil price of $20 per barrel from the fourth quarter of 2014 to the end of the fourth quarter of 2015 (see figure 5). The central tendency for the oil price is based on the prices of oil futures. Table 2 shows the results of this scenario. An oil price shock would lead to a fall of 0.2%-point in global GDP next year compared to the base scenario. The negative economic effect will be greater on the eurozone and the US, both of which are energy importers. Such an oil shock would lead to a 0.5%-point reduction in economic growth in the eurozone compared to our base scenario, and unemployment would remain unchanged next year rather than falling as expected in that scenario. An oil shock would cause inflation to rise sharply next year in both the US and the eurozone. This might even seem to be desirable in the eurozone, as it would bring inflation closer to the ECB’s 2% target, but it should be emphasised that such an energy-driven effect would be entirely temporary. These results apply subject to the assumption that central banks will not respond to an energy-driven rise in inflation by raising their interest rate targets.

Figure 5: Oil price shock
Figure 5: Oil price shockSource: NiGEM, Rabobank
Table 2: Results of the oil shock
Table 2: Results of the oil shockSource: NiGEM, Rabobank


International Energy Agency (2014), Oil Market Report August 2014.


The Economic Quarterly Report is a publication of the Economic Research Department (KEO) of Rabobank Nederland and a co-production with Financial Markets Research van Rabobank International.

The views presented in this publication are based on data from sources we consider to be reliable. Among others, these include EcoWin, Land Registry, NVM, DNB, CPB and Statistics Netherlands. The economic growth forecasts are generated from the NiGEM global econometric structure models.

This data has been carefully incorporated into our analyses. Rabobank Nederland accepts, however, no liability whatsoever should the data or prognoses presented in this publication contain any errors. The information concerned is of a general nature and is subject to change.

No rights may be derived from the information provided. Past results provide no guarantee for the future. Rabobank and all other providers of information contained in this study and on the websites to which it makes reference accept no liability whatsoever for the content or for information provided on or via the websites.

The use of this publication in whole or in part is permitted only if accompanied by an acknowledgement of the source. The user of the information is responsible for any use of the information. The user is obliged to adhere to changes made by the Rabobank regarding the information’s use. Dutch law applies.

Abbreviations for sources: CBS: Statistics Netherlands, EIU: Economist Intelligence Unit, NIESR: National Institute of Economic Social Research, ONS: Office of National Statistics, OECD: Organisation for Economic Co-operation and Development.

Abbreviations used for countries: GB: Great Britain (UK), IE: Ireland, US: United States, HU: Hungary, DE: Germany, IT: Italy, NL: Netherlands, ES: Spain, PL: Poland, AT: Austria, FR: France, GR: Greece, TR: Turkey, ID: Indonesia, JP: Japan, BR: Brazil, RU: Russia, CN: China, BE: Belgium, FI: Finland, DK: Denmark, LT: Lithuania, EE: Eurozone, CY: Cyprus, PT: Portugal, SI: Slovenia

The Economic Research Department is also on the internet: www.rabobank.com/economics

For more information, please call the KEO secretariat on tel. +31 (0)30 – 216 2666 or send an email to economics@rn.rabobank.nl

Hans Stegeman, head of International Research, Economic Research Department
Tim Legierse, head of National Research, Economic Research Department

Graphics: Selma Heijnekamp and Reinier Meijer

Production coordinator: Christel Frentz


naar boven