5 key themes shaping the global economy
Schroders Chief Economist Keith Wade sees five key themes shaping the macroeconomic landscape and supporting risk assets over the next year including energy prices, central bank monetary policy and the hunt for yield.
27 May 2015
From an economic perspective we still believe that the full dividend from cheaper energy is yet to be felt. While the challenge for markets will come from Federal Reserve (Fed) tightening, that will be tempered by ongoing liquidity provision from the European Central Bank (ECB) and the Bank of Japan (BoJ).
Lower oil prices mean lower inflation and stronger growth
So far, lower oil prices have fed through into lower inflation in 2015 in the UK, US and eurozone. However, the evidence for stronger growth has been disappointing.
In the US, though, significantly improving real income and wealth should result in a pickup in consumption in the current quarter.
More encouragingly, retail sales volumes in the eurozone are accelerating and it is likely that the euro region will outpace both US and UK GDP in the first quarter.
Oil and currency are rebalancing the world economy
We are seeing more of a convergence in growth this year as the US has slowed while Europe and Japan have picked up.
This is partly because lower energy costs have been supporting growth in the developed world, and because Europe and Japan have been less impacted by energy industry cutbacks than the US.
Furthermore, the stronger US dollar/weaker euro and yen is skewing growth away from the US towards the eurozone and Japan.
Fed to tighten as US economy normalises
Although US growth slowed in the first quarter, we still expect the Fed to raise interest rates in September (we updated our view last month).
The combination of a more normal labour market and a banking system that is beginning to provide credit to the real economy again, underpins the need to move away from emergency monetary policy.
We expect the Fed funds rate to be at 2.5% by end 2016.
Emerging markets: pockets of strength
Although activity remains subdued in the emerging markets, there are pockets of strength to be found.
These include energy importers and manufacturing-oriented countries in Asia (which are well placed to benefit from improved growth in Europe and the US).
With a Fed rate rise on the cards, we would focus on economies with strong balance sheets and low external financing requirements.
We would also favour economies like India, which has seen a significant improvement in its current account and has been able to attract strong capital inflows since the 2013 "taper tantrum".
Liquidity: the search for yield continues
The search for yield has been given fresh impetus by the start of ECB quantitative easing and continued money printing by the BoJ.
Importantly, this action should help temper some of the concerns the Fed has about higher market volatility and a repeat of the 2013 experience when they tighten policy.
More generally, liquidity will continue to drive flows into real estate and equities across Europe as well as keeping the currency weak.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.