Dr. Michael Hasenstab, CIO, Templeton Global Macro, provides a counterpoint to recent pessimistic forecasts for global growth.
This paper, "Global Growth: Headwinds or Tailwinds?," aims to provide an objective analysis of the main trends shaping the global economy in 2015.
Excessive pessimism characterizes the current view on the global growth outlook, with some of this sentiment due to a mistaken interpretation of the reasons behind the recent sharp decline in oil prices. We see the decline in oil prices as being largely due to a positive supply shock, rather than a weakening of oil demand. A positive supply shock that drives down the price of oil provides a significant boost to global growth, though we think there will also be winners and losers.
The US economy benefits significantly from lower oil prices and is currently in a kind of "goldilocks" scenario: The recovery has firmed while receiving a boost from lower oil prices; those lower oil prices are helping keep inflationary pressures muted, thus allowing the Federal Reserve to maintain very low interest rates. However, base effects on energy prices will be much less favorable down the road and, combined with a tighter labor market and faster economic growth, could result in a meaningful acceleration in inflation pressures. At that point we might see a sudden upward adjustment in bond yields. This growth and inflation outlook also implies that current US dollar strength still has longer to run.
The eurozone economy relies to a very important extent on exports and should benefit from several strong tailwinds largely being ignored by the financial markets. First, robust growth in the US, particularly in terms of consumer demand, should provide solid support for eurozone exports to the US. Second, the European Central Bank's effectively open-ended stimulus program will put further downward pressure on the euro, also boosting exports. Third, the decline in oil prices will support growth, adding to the potential for European growth to surprise to the upside this year.
Japan appears to have exited the cycle of deflation and contraction in nominal growth since the launch of "Abenomics." However, Japan now needs decisive action to raise its potential growth path, consolidate the positive inflation dynamics and improve revenue collection. All three conditions are needed to secure stronger growth and debt sustainability. Progress in 2015 will be the key test.
China, as the world's largest importer of oil, will also be an important beneficiary of lower energy prices, which would help mitigate the country's mild and healthy slowdown. However, some observers have argued the China's growth rate is actually much lower than indicated by official statistics. We believe this argument simply does not stand up to scrutiny, and we think the rebalancing of China's economy might be further along than is commonly believed. Overall, we see the dynamics at play as meaning that the country can support a gradual rebalancing at a more moderate, sustainable pace of growth that can still contribute strongly to global growth.
Markets perceive the sharp reduction in oil prices as a net negative for all emerging markets, rather than a major source of differentiation. The emerging-markets world includes some of the world's largest oil producers but also some of its largest oil consumers. We believe the oil price decline is likely to further accentuate the differentiation between the world's strong and poor performers, particularly among emerging markets.
Our view is that the overall outlook is sufficiently supportive to allow countries with sound policies to thrive. We will likely see great differentiation in cross-country performances, making fundamentals-based investment strategies critical.
Global Macro Shifts is a research-based briefing on global economies featuring the analysis and views of Dr. Michael Hasenstab and senior members of Templeton Global Macro. Dr. Hasenstab and his team manage Templeton's global bond strategies including unconstrained fixed income, currency and global macro. This economic team, trained in some of the leading universities in the world, integrates global macroeconomic analysis with in-depth country research to help identify long-term imbalances that translate to investment opportunities.
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