The soft patch stemmed from overly optimistic expectations at the beginning of the year, which led to some overproduction and stock building in the corporate sector. But, nonetheless, equity markets actually exceeded our expectations. The volatility we had expected for most of the year came somewhat later, but it eventually did occur in the latter months of the year with full force. Unexpected for us – as for most corporate forecasters – was the continued decline in interest rates and bond yields. The fear of deflation and the hopes for forceful reactions on the part of monetary authorities played a major role.
Looking forward to 2015, we have been sticking to our assumption of a moderate global expansion which would pull the eurozone out of recession. In recent days we have actually raised our forecast for the eurozone to 1.3% real GDP growth for next year, and for Germany to 1.6%. There is a double-boost for the currency union from declining oil prices and the depreciation of the euro. Both effects combined will add 0.75 percentage points to GDP growth. On top of that, we see the former crisis-countries in the eurozone – which we now prefer to call the “reform countries” – on a clear upward trajectory. Oil prices will on average remain significantly lower than in 2014. This is a boon for the global economy, benefitting basically all industrialized countries like the US, Japan, Korea and the EU, but also bolstering growth and fiscal consolidation in major emerging markets like China, India and Indonesia.
Where are the risks for next year? Obviously, the speed of the oil-price decline poses a risk for the weaker oil-producing countries. Russia is in recession, Venezuela on the brink of default and Libya, Iran and Iraq are in turmoil. The weakness in these economies will not outweigh the positive cyclical effects of the oil price decline for the global economy. However, it would spell trouble for financial markets if Russia were to stop servicing its liabilities. This, we think, is extremely unlikely. Also, some of the high yield bonds in the US oil and gas sector are at risk, as the shale boom cools off and investment is cut back or shelved altogether. But these possible negative events are of insufficient scale to derail the global economy.
A factor that is simultaneously a driving force as well as a risk for global expansion is an extended stance of ultra-loose monetary policies. While stimulating demand and accelerating financial market gains, these policies also fuel the risk of overheating and financial bubbles. And they also have negative implications for the distribution of wealth and income besides dis-incentivizing savers and slowing down the growth of pension funds. We expect the monetary policy authorities to take into account considerations of financial market stability and to slowly and prudently change course. Correspondingly, drastic losses on overvalued financial markets do not seem likely. We do, however, expect market volatility to be extraordinarily high.
2015, therefore, will be another challenging year for investors, navigating between asset classes in an environment of depressed yields. In our view, sovereign bond yields will rise only moderately, highly volatile stock markets will continue to trend upwards, real assets will be in high demand and the tensions on the currency markets will persist. At least at the beginning of the next year, the US dollar should be on the winning side. So let’s make the best of it.