Bumpy recovery and volatile financial markets

At the start of the year prospects were fairly good that global economic growth in 2015 would be substantially stronger than in 2014. Michael Heise, Chief Economist at Allianz SE: “Following the bumpy start to the year, however, this has changed. Our latest estimates show global output rising by 2.6% in 2015, only marginally up on the 2.5% seen in 2014.”

The US economy, which looked to be returning to past strong form, stagnated in the first quarter. Major emerging markets are showing signs of weakness – see China – or, like Brazil and Russia, have actually slipped into recession. Economic parameters, such as the oil price, have seen a surprisingly strong correction. Having bottomed out in January, the oil price has since bounced back sharply. The hefty purchasing power gains enjoyed by oil-importing industrial countries and emerging markets are melting away again, at least in part. In the eurozone, where overall growth accelerated slightly in the first quarter, Germany, the largest economy, recorded lower momentum.

German economy: Upswing with blemishes

Following the slightly disappointing first quarter 2015 with growth of only 0.3%, the German economy is likely to make better progress over the rest of the year. The first-quarter slowdown was primarily attributable to a sharp rundown in inventories that is unlikely to be repeated. All major demand components – consumption, equipment, construction and exports – look set to remain on an upward path in the course of the year. By far the largest contribution to growth in 2015 will come from private consumption. “Average GDP growth of around 2% in 2015 is still within reach. However, there are some blemishes,” said Michael Heise. The impact of the minimum wage on employment is making itself felt. In addition, the rebound in inflation on the back of rising oil prices and wage cost increases is eroding some of the household purchasing power gains. And the recent wave of strikes is unlikely to boost Germany’s attractiveness as an investment location. All told therefore, we expect economic momentum to ease off again gradually, with the German economy growing by only 1.6% in 2016.

Fluctuations on the financial markets set to continue

The scale of the slide in prices on the bond market in April/May can be viewed as a normal correction of an excessive price level, but the speed of the adjustment was worrying and points to extreme volatility on the markets.

The volatility on the bond markets is likely to spill over onto the equity markets. However, the key factor for the underlying trend on the equity markets will be how the economy develops going forward. And, despite the problems with Greece, for the eurozone there is every reason for optimism. The earnings of European corporations should rise strongly in 2015. Three effects come into play here: the cyclically-induced expansion in sales volumes, higher profit margins thanks to the improvement in the terms of trade (relationship of export prices to import prices) and the exchange-rate induced boost to profits generated outside the eurozone. Heise: “The liquidity-driven rally on the European stock markets is therefore likely, at least in part, to shift into a cyclically-driven rally. Over the course of the year we by all means see upside potential on the leading European stock indices of around 10%.”

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