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Global economic outlook: most movement is under the bonnet

Economic Quarterly Report

  • Economic growth will probably weaken in large areas of the world in 2015, resulting in lower global growth
  • The eurozone is one of the few large global economies that has some momentum, driven by low commodity prices and the weaker euro
  • Monetary easing elsewhere could undermine the advantage of the weaker euro over time
  • The slower growth in China is also affecting developing countries that produce commodities
  • Trade treaties will not be able to soften the effects of weaker growth in China in the short term
  • Geopolitical tensions continue to be a downside risk to the global economy

After several strong years, economic growth in the US, the UK and China will probably weaken somewhat in 2015, leading to lower global economic growth (figure 1). The acceleration in growth in the eurozone will not be enough to offset this.

The slowing of US economic growth in comparison to 2014 is mainly due to a weak first quarter and the strength of the dollar, but technical statistical factors are also involved (see the section on the United States elsewhere in this Quarterly Report). The Chinese economy is slowing, mainly due to weakening investment growth. The current growth trend is however at the lower end of what the government considers to be acceptable, meaning that further monetary and budgetary stimulus is likely to keep economic growth at the desired level (see the section on China elsewhere in this Quarterly Report).  

Figure 1: Weakening economic growth in the US, the UK and China
Figure 1: Weakening economic growth in the US, the UK and ChinaSource: Rabobank

However, China will no longer be the fastest-growing major economy in the world in 2015, since the Indian economy is expected to reach growth of around 7½% this year. This does depend to some extent on a successful implementation of the reforms that have been announced. Given the size of the Indian economy, the impact on the global economy will however be limited.  

Although Japanese economic growth was fairly strong in the first quarter (up 0.6% on the previous quarter), this was mainly due to a strong rise in inventories. The collective contribution from the other components was only 0.2 of a percentage point, driven mainly by business and consumer spending. This suggests that Japan’s economy will continue to post only modest growth and does not indicate a spectacular recovery (see the section on Japan elsewhere in this Quarterly Report).

Eurozone has the wind in its sails, but at whose expense?

The eurozone economy has the wind in its sails: low commodity prices are supporting disposable income, while the low euro is supporting exports. While consumers in the eurozone and around the world are benefiting from the currently low level of commodity prices, this exerts serious pressure on public and private incomes in producing countries. For instance, the Australian government deficit in 2015-2016 will double to 2.1% of GDP compared to forecasts last year due to lower income from iron ore.

Since mid-2014 the accommodative monetary policy of the ECB – and later on, the market expectations of quantitative easing – has led to a decline in the euro against other major currencies (see the section on Interest Rates and Currencies elsewhere in this Quarterly Report). A weak euro lowers the price from eurozone products for foreign buyers. Over time, this will boost exports from the eurozone and will thus increase economic growth. The weaker euro however also means a stronger dollar, which is causing problems for the US economy (US exports fell as a result by 2.0% q-o-q in the first quarter of 2015). 

The positive effect of the weaker euro on exports however failed to materialise in the first quarter. The slower growth at major trading partners like the US, the UK and China probably more than offset the benefits of lower prices (figure 2). In the forecast for the rest of 2015, it is expected that the benefits will affect exports, but also that imports will grow even faster, meaning that net exports will not contribute to growth (see the section on the eurozone elsewhere in this Quarterly Report)

Figure 2: Asia pulls global trade growth into negative territory
Figure 2: Asia pulls global trade growth into negative territorySource: CPB, Rabobank
Figure 3: Weaker euro and yen due to monetary easing
Figure 3: Weaker euro and yen due to monetary easing Source: Macrobond, BIS

A monetary race to the bottom?

While the euro and the yen have weakened due to the monetary policies of the ECB and the Japanese central bank (BoJ) respectively, the other side of the coin is that other currencies have strengthened. These include the dollar (figure 3), which put a brake on US exports in the first quarter of 2015. This situation will probably continue in the next few quarters. Given this weaker economic outlook as a result of the strong dollar, among other factors, the US central bank, the Fed, will probably not raise its policy interest rate until the fourth quarter of 2015. The increase in the policy interest rate may, moreover, be implemented more cautiously than we have seen in the past. The Fed is thus reacting – implicitly and partially – to the global monetary easing trend.

The Chinese central bank (PBOC) is also joining in this monetary easing race. The government is trying to keep economic growth at a decent level, now that growth this year is expected to be around 6¾%, the lowest growth rate since 1990. Furthermore, China’s competitive position has weakened recently because its currency is pegged to the dollar and has thus appreciated significantly. The PBOC has accordingly implemented two cuts in its policy interest rate since the beginning of this year. Further rate cuts this year are likely, since the current growth rate in China is at the lower end of the government’s considers desirable.

The Fed and the PBOC are not the only ones who have responded to the global easing trend. Following the ECB and the Bank of Japan (BoJ), more than 20 central banks have eased their monetary policy this year. Figure 4 shows a selection of the interest rate cuts since the ECB announced it would begin quantitative easing. The objective of monetary easing varies from one country to another. Some countries are suffering from very low inflation, while others are trying to protect linked exchange rates or counter the appreciation of their currencies.

There does not yet appear to be an end in sight to this global monetary easing. The ECB has only just begun with the implementation of its quantitative easing programme, and the BoJ may possibly increase the rate at which it is easing its policy later this year. This could bring new reactions from monetary policy-makers elsewhere, certainly since the low level of global inflation still makes this possible (figure 5). The question therefore is, to what extent can the eurozone retain the advantage of a weak currency. 

Figure 4: Policy interest rate cuts after the ECB QE announcement
Figure 4: Policy interest rate cuts after the ECB QE announcement Source: Macrobond
Figure 5: Low inflation offers room for additional monetary easing
Figure 5: Low inflation offers room for additional monetary easingSource: Macrobond

Effects of slower Chinese growth on global exports

The slower Chinese growth compared to previous years mainly affects Chinese industry and construction. It means that demand for imports of commodities from China is not rising as fast as in previous years, while the growth in the production of commodities is expected to continue at the same level. Developing countries that export commodities to China will thus be affected on two fronts. Firstly, there will be pressure on commodity prices, which are already low. It is true that the strong dollar will partially mitigate the effect of this on the incomes of commodity producing countries, since most commodities are traded in dollars. Secondly, sales of commodities will not increase as rapidly as they did in the past. Therefore, the benefit of strong growth in Chinese imports for commodity producing countries in the past is now disappearing.

Figure 6: Exports to China fall sharply in the initial months of 2015
Figure 6: Exports to China fall sharply in the initial months of 2015Source: Macrobond

Indeed, not only the commodity producers are affected; countries that export manufactured products are also seeing their exports decline. Mainly the developing countries in Asia, especially in the ASEAN region, will feel this due to their strong links to the Chinese economy. Latin America, Europe, the US and Africa are however also seeing their exports to China expressed in dollars decline, even though the effect of the strong dollar also plays a part here (figure 6).

Could trade treaties provide a counterweight to weaker economic performance in China?

The effects of continuing lower growth in China on the economies that partly depend on exports to China could be offset by more intensive trade between these countries. There are currently two major free trade treaties under negotiation. The Trans-Pacific Partnership (TPP) concerns a free trade treaty between 12 countries in the Pacific Ocean, including the US. The Transatlantic Trade Investment Partnership (TTIP) is a treaty between the US and the European Union. Collectively, the countries involved in these two treaties represent 60% of the global economy. The substance of both treaties is however not yet defined, and implementation in the short term is thus not a realistic prospect. In addition, the benefits of trade, even with rapid implementation, are normally only felt in the medium to longer term. We do not, therefore, expect increased trade to compensate for the negative effect of slower Chinese economic growth in the short term. A successful realisation and implementation of these treaties will, moreover, not necessarily lead to new trade in the longer term. To some extent it will mean only that trade moves from trade between countries not included in a treaty to trade between countries that are included in a treaty. For that matter, more intensive trade, just like monetary easing, may be at the expense of third parties, although the TTIP could over time ease the pain of weaker demand from China in the case of the eurozone. 

The TTP could provide a counterweight to the dominance of China in the Trans-Atlantic region. Negotiations are however still ongoing, and there is as yet no agreement regarding the degree of liberalisation and the participating sectors. Japan for example has problems in opening up its still highly protected agricultural sector, while there is resistance in the US due to fears that US jobs will be lost to low-wage Asian countries. Since President Obama currently has only limited authority to negotiate without interference from Congress, it is uncertain whether agreement on the TPP can be reached this year. Since the negotiations on the TPP are more advanced than the negotiations on the TTIP, the US will probably give priority to a deal with Asia and there is some resistance from Europe, agreement on the TTIP will probably take even longer to accomplish. 

Geopolitical tensions are still a risk to the global economy

The geopolitical tensions around the world continue to be a downside risk for the global economy. Athens has been trying to reach agreement with its creditors for months without success. Without a deal, Greece may not be able to meet its repayment obligations to the IMF in June (and without a deal, it is virtually certain that the current situation cannot continue through July). This might mean that Greece will exit the euro. The re-election of Prime Minister David Cameron in the UK on 7 May has moreover brought a referendum, and thus a UK exit from the European Union, a step closer. Both these exits could affect sentiment in Europe. The same applies to an escalation of the conflict in Eastern Ukraine, or in the Middle East.  


The Economic Quarterly is a publication of Economic Research (KEO) of Rabobank and a co-production with Financial Markets Research.

The views presented in this publication are based on data from sources we consider to be reliable. Among others, these include Macrobond. The economic growth forecasts are generated from the NiGEM global econometric structure models.

This data has been carefully incorporated into our analyses. Rabobank 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, DE: Germany, IT: Italy, NL: Netherlands, ES: Spain, AT: Austria, FR: France, GR: Greece, BE: Belgium, FI: Finland, EZ: Eurozone, CY: Cyprus, PT: Portugal, SI: Slovenia, MT: Malta, EE: Estonia, LV: Latvia, SK: Slovakia, LT: Lithuania.

Abbreviations used for currencies: BRL: Brazilian real, IDR: Indonesian roepia, INR: Indianroepie, TRY: Turkish lira, ZAR: South African rand.

Economic Research 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

Allard Bruinshoofd, head of International Research, Economic Research
Tim Legierse, head of National Research, Economic Research

Graphics: Selma Heijnekamp and Reinier Meijer

Production coordinator: Christel Frentz

Carlijn Prins
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 1929 6455

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