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Global economic outlook: room for stronger growth recovery

Economic Quarterly Report

  • Recent data support our expectation of 3½% global economic growth in 2015. There are actually factors present that could generate a stronger recovery in growth
  • The economic outlook is overshadowed by uncertainty regarding both the Europe-Greece negotiations and the armed conflict in eastern Ukraine
  • We expect economic growth to accelerate mildly in 2016 to 3¾%. Growth in the eurozone will probably pick up by slightly more from a lower level, from 1¼% in 2015 to 1¾% in 2016

The recent signs from the economy are not unfavourable. Looking back, we see that the eurozone economy grew by 0.3% in the fourth quarter of 2014 compared with the previous quarter. The UK achieved 0.5% growth, and the US actually generated a 0.7% increase. Since the last quarter of 2014, the oil price has fallen much further, the European Central Bank has announced a quantitative easing programme and the euro has weakened significantly against other currencies. Looking ahead, there are other economic factors suggesting a growth acceleration in 2015 and 2016 in both the eurozone economy and the global economy. 

At the same time however there are geopolitical and political risks that are becoming increasingly serious, which makes us pause before wholeheartedly translating the positive signs into a higher economic growth estimate. We write this Quarterly Economic based on the assumption that Europe and Greece will reach agreement on the substance of the support programme that is needed. We also assume that the local conflict in Ukraine will not significantly escalate. Clearly, failure of the negotiations between Europe and Greece or a significant escalation in eastern Ukraine could negatively affect the economic outlook. What is more difficult to estimate is the extent to which recent developments have already blighted confidence and therefore the prospects for the economy.

Cheap oil: both stimulus and risk

Measured in US dollars, the oil price fell by more than half between June 2014 and January 2015, before picking up somewhat afterwards (figure 1). At the global level, the fall in the oil price has led to a huge shift of income from the net-producing to the net-consuming countries. On the assumption that the oil producers on average have less propensity to use their income for consumption than the oil-consuming countries, this bodes well for global economic activity.

Although consumers around the world benefit from higher purchasing power due to cheaper oil, the net revenue loss suffered by the oil-producing countries is significant  (figure 2). A number of them are vulnerable to this development, see for instance Hayat (2015). Their populations generally have limited political voice and freedom, at least compared to what we are used to in the West. The economic pain of the Great Recession could be softened – and indeed, the risk of social unrest actually bought off – by additional social spending funded by oil revenues. The lower oil price makes this social model more difficult to maintain.

Figure 1: The collapse of the oil price
Figure 1: The collapse of the oil priceSource: Macrobond, Rabobank
Figure 2: Lower oil revenues press hard on budgets
Figure 2: Lower oil revenues press hard on budgetsSource: IMF, Eurasia, Rabobank

Temporary deflation is a good thing

Inflation in the eurozone at the beginning of 2015 was negative. In other words, deflation. Chronic deflation is bad for the economy (see Boonstra and Verduijn, 2014). But the current global decline in consumer price inflation (figure 3) is a direct reflection of the gain in purchasing power in the oil-consuming countries and thus a positive sign for economic growth. Consumers notice the effects of lower prices in their energy bills and at the pump. Businesses are seeing the share of production costs taken up by energy decline, and pass this on to consumers or make better profits. Businesses and households thus have the potential for spending at least some of this increase in purchasing power on higher consumption.

Monetary policymakers are at the same time on their guard to ensure that low and negative inflation does not become entrenched in the expectations of consumers and producers. In the US for example, our view is that the Fed (the US central bank) will not be able to implement its planned interest-rate hike in June. In the eurozone in January the ECB saw no other option than to apply quantitative easing, primarily because the decline in expected inflation was continuing.

Figure 3: Lower oil price leads to lower inflation and deflation
Figure 3: Lower oil price leads to lower inflation and deflationSource: Macrobond
Figure 4: ECB announcement weakens the euro
Figure 4: ECB announcement weakens the euroSource: Macrobond (BIS)

The weaker euro is good for the eurozone economy, but puts other countries in a difficult position

The recent weakening of the euro (see figure 4) is a direct result of the quantitative easing announced by the ECB and a positive impulse for economic growth in the eurozone. The weak currency stimulates international demand for products from the eurozone and reduces demand for imports. We are assuming that this will also be the most important channel through which ECB policy will have an impact on the economy.

But a weaker euro means stronger currencies elsewhere. The ECB is thus putting pressure on other monetary policymakers, as we are seeing in Switzerland and Denmark. In January, the Swiss central bank (SNB) felt it had to abandon the currency peg (at 1.20 CHF/€) in the face of substantial capital flows into Switzerland (once again) in anticipation of the ECB’s decision to apply quantitative easing. In past years, the Swiss had purchased euros equivalent to 90% of the country’s Gross Domestic Product (GDP) to keep the franc steady against the euro. The additional Swiss money that came into circulation as a result of this led to an undesirable increase in property prices in Switzerland. After the peg was abandoned, the Swiss franc appreciated sharply to find a new balance between 1.05-1.10 €/CHF at the time of writing. The Danes have linked their currency (the krone) to euro for much longer as part of their monetary policy. However, the Danish central bank was also forced to intervene heavily to protect the peg in the face of an excessive inflow of foreign capital. The Danes have already reduced their deposit facility interest rate to -0.75%.

Larger countries are also struggling to deal with the side-effects of the new European monetary experiment. We have already mentioned the US briefly. But the weaker euro is not helpful for China either. The Chinese yuan is effectively linked to the dollar, and is thus appreciating along with the dollar against the euro. The timing of this is awkward. China is striving to achieve lower growth with a more sustainable composition, but now that growth is slowing as a result of waning investment growth, a simultaneous weakening of the country’s external competitiveness is bad news. In recent months, China has benefited from lower oil and commodity prices and growth has remained reasonably stable, partly due to foreign demand. Sentiment indicators in China however are now suggesting that foreign demand is also weakening to some extent. We cannot therefore exclude the possibility that the Chinese central bank will intervene to weaken the yuan.

The signs are positive, but we wait for confirmation from sentiment and the data

With lower oil prices, greater purchasing power for consumers due to lower inflation and – for the eurozone – additional support from the weaker euro, all the signals are positive for a stronger global economic recovery than had been so far expected. At the time of writing, we are not seeing this convincingly reflected in the harder data. To some extent, this is a matter of having to be patient: the latest growth figures for the euro area are retrospective and concern the period from October to December 2014. On the other hand, global sentiment among producers is still not showing any meaningful response to these impulses (figure 5). There are also signs from various countries to suggest that in fact a weaker trade dynamic is contributing to the economic challenge, while growth in world trade has already been far from robust in recent years in historical terms (figure 6).

There are several potential explanations for this last observation. There are rumours that China is reducing its stocks of commodities to some extent. We have no hard figures for this, however the notion is consistent with the fact that commodity prices are generally in decline, as well as the oil price. Discussions with Chinese counterparties and Chinese business customers also suggest that people are responding very quickly to the changed tone from the government regarding growth in China. Moreover, it is very feasible that the continuing process of debt reduction in the industrial countries is still exercising a stronger influence, especially with regard to the propensity to invest. Lastly, but certainly not least importantly, it is possible that the rising geopolitical and political tensions in recent months are weighing more heavily on sentiment than expected and are cancelling out the positive factors. In practical terms, the Greek elections and the radically different intentions of the new Greek government have led to nervousness in the financial markets and possibly also to additional caution in Europe among business owners considering cross-border investments. The resurgent conflict in Ukraine in January could be another explanation. Russia’s role in this conflict, in particular its support for the separatists in Ukraine, is still difficult to measure. Apart from the economic sanctions, Russia’s economy is suffering from the lower oil price. The conflict in Ukraine appears to have only strengthened support for President Putin, and offers Moscow a welcome distraction from its domestic economic problems.

Figure 5: No visible improvement in producer sentiment
Figure 5: No visible improvement in producer sentimentSource: Macrobond, Rabobank
Figure 6: Little dynamism in world trade
Figure 6: Little dynamism in world tradeSource: CPB World Trade Monitor, Rabobank

All in all, the ingredients for a stronger economic recovery than we previously had estimated are certainly in place. Against this, there are also definite geopolitical and political risks at play. On balance, we are expecting a modest pick-up in global growth to 3½% in 2015 and 3¾% in 2016. Growth in the eurozone will pick up by slightly more from a lower level, from 1¼% in 2015 to 1¾% in 2016, driven mainly by stronger domestic demand.


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.

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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

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


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