Here's an early Christmas present for the economists of Wall Street.
2015 may be the first year in five in which they get to raise forecasts for global economic growth rather than cut them.
That may be fanciful thinking as the year ends with Russia in crisis, investors rediscovering volatility and central banks returning to the monetary pumps. Other potential risks include more geopolitical flare-ups, elections from Greece to the U.K., a hard landing in China, a premature exit from Federal Reserve stimulus and a slide toward deflation in Europe and Japan.
Recent history is on the side of the pessimists. A year ago, the median forecast of economists surveyed by Bloomberg News was for growth of 3.5% in 2014. It has since been scaled back to 3.2%. Cuts were also made in 2011, 2012 and 2013.
Trying to explain this year's miss, economists at JPMorgan Chase & Co. blamed bigger-than-anticipated slowdowns in emerging markets and a failure by the euro area to gain traction.
Still, in the holiday spirit, here are some grounds for optimism that the forecast of the Bloomberg News survey of 3.5% expansion in 2015 will, for once, prove too low.
-- Oil's 40% slide of 2014 will boost the spending power of consumers and companies. The International Monetary Fund yesterday estimated the decline could add as much as 0.7% to global gross domestic product next year. Oil consumers have a higher propensity to spend than producers and helped power growth accelerations in the late 1980s and 1990s.
Markets are “underestimating the upside risk to growth,” said Torsten Slok, chief international economist at Deutsche Bank AG, who estimates the Group of Seven could grow faster than 3% as a result.
• Central banks are set to ease monetary policy even further. The Bank of Japan recently ramped up its buying of bonds and may soon be followed by the European Central Bank, while China and other emerging markets are cutting interest rates.
Even if the Fed raises rates for the first time since 2006, it's unlikely to do so before mid-year and says it will act gradually and wait to unwind its balance sheet. Same for the Bank of England.
Credit Suisse Group AG estimates the balance sheets of the four major central banks will grow 13% next year, or $1.3 trillion, after this year's 5 percent expansion.
• The U.S. is set for its fastest growth in a decade amid a firming job market and falling fuel costs. Unemployment is at a six-year low of 5.8%, homebuilder confidence is near a nine-year high, manufacturing is accelerating and, having deleveraged, consumers are more confident than at any time since the last recession. Economists are eying a 3% expansion.
At hedge fund SLJ Macro Partners LLP in London, co-founder Stephen Jen talks of a “converge up” scenario in which the U.S. leads the world rather than a “converge down” environment in which it's dragged back by events overseas.
• The euro area may not be so bad. A weaker currency should support exports, banks may lend more after being stress tested, the ECB is turning more aggressive and governments are less austere. Investor and business confidence is climbing in Germany, the region's lynchpin.
The crisis economies of Ireland, Greece, Spain and Portugal are now growing faster than the region, a payoff for “tough love” reforms they were forced to deploy, according to Berenberg Bank's Holger Schmieding, who predicts euro-area growth of 1% next year. Spain's economy grew 0.6% this quarter, according to the country's central bank, capping its best year since 2008.
WORD STOCKS RISING
• Financial conditions remain supportive. The MSCI World Index of stocks is up almost 6% from a year ago after 2013's 24% jump. The U.S. 10-year Treasury yield is lower than where it began the year at just over 2%, while the equivalent German bund ducked below 1% in August and stayed there.
• Banks are more willing to lend. A JPMorgan Chase gauge of lending standards in the major economies is approaching its easiest since 2006 and demand for cash is accelerating too. “This shift out of both the credit demand and supply curves signals acceleration in overall credit creation and a pickup in economy-wide demand growth,” said chief economist Bruce Kasman.
• Wages are starting to accelerate in the U.S., Japan, the U.K. and Germany. Although the pay hikes aren't big and workers have a long way to regain ground lost since the global recession, the salary boosts may still be enough to support consumer demand.
“Job growth is fueling higher incomes, which if fueling more revenue for businesses, spurring more hiring and faster wage growth, which in turn produces more business spending,” said Bill Adams, senior international economist at PNC Financial Services Group.
• Fiscal policy is no longer as restrictive. In the U.S, three years of budget tightening has ended and policy is now neutral, according to Bank of America Merrill Lynch. There is also no fiscal drag likely in Europe, while Japanese Prime Minister Shinzo Abe has postponed a second increase in the consumption tax and is considering an extra budget of as much as 3 trillion yen.
• The dollar's surge. While a rising U.S. currency will pinch those who borrowed in it, especially emerging market companies, its ascent will also offer some relief by fanning weak inflation abroad and encouraging Americans to ramp up exports.
• Emerging markets. While Brazil, China and Russia have slowed, low oil is a boon for Turkey, India and South Korea, and the resulting low inflation allows some central banks to focus on supporting growth. Bill Street, head of investments for Europe, the Middle East and Africa at State Street Global Advisors, says investors should remember “reformers are performers,” pointing to potential in India and Indonesia.
• China is slowing, but Capital Economics Ltd. notes that given its size, 7% growth means demand is potentially as big as in the last decade when growth averaged 10%. A shift toward consumption could also help reduce China's trade surplus, boosting activity elsewhere.
“Given the momentum we have we could even be on the conservative side,” Street said of his forecast for 4% global growth next year.