Every year Global Perspectives publishes its annual white paper covering the 5 keys trends we see impacting the global economy in the year ahead.
For many parts of the global economy 2015 will be the most turbulent year since the worldwide economic collapse of 2008.
1. The US Dollar reigns supreme
In 2015 the greenback will continue to strengthen on the back of accelerating US growth.
The US economy created 7,000 jobs per day in 2014 and this remarkable rate of employment growth is set to escalate in 2015.
The perceived decline of American power has been greatly exaggerated.
Commentators confuse the current US unwillingness to wield hard power, for a lack of underlying real power. They also confuse deadlock in Washington with the underlying dynamism of many US regions and States.
The US still controls the global economy, all the world's oceans, its trade routes and its reserve currency. It spends nearly as much on defence as the rest of the world put together. This will not change anytime soon.
In 2015 the US will continue to be the global engine for growth, enterprise and innovation, as it has been for most of the last century.
This should not be surprising. The English-speakers (i.e. the USA/UK) have run the world for 3 centuries now. They have consistently defeated all challengers to world hegemony that have appeared over this time (Philip II, Louis XIV, Napoleon, Kaiser Wilhelm II, Hitler, Stalin etc.).
Despite the chorus of BRIC hysteria over the last few years, the economic growth in these countries has taken place because they adopted US policies of trade liberalization, economic liberalization and a free market. In 2015 they will endure a major emerging market crisis. Their power will not surpass the US for decades (if ever).
The main cloud on and an otherwise rosy US economic horizon is an overvalued stock market, which will suffer a significant correction at some stage in the medium term (perhaps as Obama’s term ends in in 2016).
In the meantime the US Dollar will continue its run of strength throughout 2015, placing huge pressure on developing world currencies.
2. Emerging Market Meltdown
2015 will be a year of escalating geo-political tension - which will take place alongside a major crisis in multiple emerging market economies.
The world is already trying to digest a series of political and economic crises and the crash in the oil price will cause massive upheaval around the developing world.
The forthcoming increase in US interest rates will make matters worse.
Globally we expect the first of a wave of developing country soverign and corporate defaults in 2015.
Venezuela, Ukraine and Greece will all default on their sovereign government debt, as will a host of Russian and international companies who are exposed to the oil price crash and are unable to roll their US denominated debt.
In Asia the decline of the Japanese Yen, Russian Ruble and the Australian Dollar will continue. Japan will remain in recession in 2015, while Australia will continue trying to rebalance the economy following its commodity boom. Low interest rates are making this difficult and have over-heated an already laughably overvalued property market.
Russia will stoke up much more trouble in 2015. The triple whammy of an oil price crash, deepening economic sanctions and a worthless currency, will cause its economy to enter a deep recession.
A collapsing Russia will be very dangerous for the rest of the world. Russia is “the homeless guy with the gun” - dangerous, desperate and unpredictable. A collapsing empire’s last gasp for power is always a bloody, messy affair (Rome, Byzantium, Ottoman, British empires).
Across the Eurasian landmass there is the risk of a permanent "Arc of Instability" - stretching from West Africa through the turmoil of the Middle East to a fragile Hong Kong. The fallout from the Arab Spring will continue in 2015, with further unrest and Civil War in Syria, Egypt and Libya.
In the Middle East Turkey has been the growing regional power. For nearly all recorded history (bar the last century) Turkey has been the epicentre of a major world empire. In recent years it has been putting in place tentative steps to regain its position, flexing its growing diplomatic and economic power in the region.
In 2015 Turkey will face the same challenge as other key developing nations – South Africa, Mexico, Indonesia and Brazil –avoiding major economic and currency volatility caused by the US Federal Reserve increasing interest rates. Against a common background of growing inflation, contagion from Russia, slowing economic growth and rising interest rates, that will be a tall order.
Things are even worse in Latin America. Argentina, the perennial basket case, is suffering from massive inflation (over 40%), while in 2015 the economy in Venezuela will collapse - the crash in the oil price is taking the last remnants of its Bolivarian revolution with it. Brazil will flirt with recession and is threatened with losing its investment grade rating (lowering it to below Peru and Columbia), unless it can swiftly reforms its economy and public spending.
Unfortunately Latin America and many other developing countries (particularly India and Brazil) have missed an important opportunity to implement reforms in their economy and build up their neglected infrastructure when times were good - they will be next to impossible to do so in the looming downturn.
In Africa 2015 will continue to be a year of gradual growth. West Africa will slowly recover from the Ebola crisis, as the disease is brought under control. Growth in Nigeria - now Africa's largest economy - will slow but remain strong around Lagos - the commercial capital and soon to be Africa's largest city).
Elsewhere economic growth in oil producing countries (Angola, Libya) will be slower than in previous years, but in general the gradual African Renaissance will continue, as China builds out new infrastructure across the continent, often providing the first new ports, railways and roads since colonial times.
3. China’s economy begins to implode
In 2015 China will be a slow motion car wreck.
China’s bubble is in the process of bursting and the Communist Party know it. The decrease in interest rates in late 2014 was a belated attempt by the Central Bank to stimulate the economy.
The bursting property bubble, fragile banking sector and mountains of dodgy bank loans will make this highly unlikely.
We have always being sceptical about the durability of the Chinese economic miracle - most people can’t name even one Chinese company.
China is essentially an island economy, surrounded as it is by impassable mountains, deserts and jungle on 3 of its 4 sides.
The country is awash with opaque bad debt and Off-Balance Sheet vehicles (remember them). No-one really knows their true size and local authorities are hiding the scale of the problem, trying desperately to rollover their debts (hence the recent repeated quarter end panic in the Inter-Bank money markets).
This situation is being compounded by the gradual collapse of the property bubble, storing up a wave of future defaults and severely denting consumer confidence. The Bank of China is well aware of this and it will reduce interest rates again in 2015 in a desperate attempt to keep economic growth on track and try to move the economy from one based on investment, to one driven by consumption. It won't succeed.
The problem is that in China, capital is not allocated by the market (as it is in other modern economies), it is allocated by who you know in the upper echelons of the Communist Party. Much of China's recent growth has been based on dodgy infrastructural loans made with cash gathered from its helpless citizen’s savings - the Chinese people have limited investment options so we can expect their enthusiasm for virtual currencies like Bitcoin to rocket as the economic stumbles.
While China consistently reports impressive growth rates (often over 7 %), this is not reflected by the growth in demand for electricity (currently 4%). Electricity usage is one of the most reliable measures of economic growth. This combined with the fact that the employment prospects of local Chinese officials dependents largely on reporting economic growth figures that meet the central government target, means China’s growth figures should be met with a healthy dose of scepticism.
China has opened itself to the world 3 times in the past 500 years. Every time the same thing happens - the coast quickly becomes wealthy and the interior stays dirt poor. The interior then rises up and takes back over the coast, closing the country off the world again.
Despite this China may well become the world's largest economy over the next few years – but so what? It was the largest economy in the world 150 years ago, when the British reduced it to penury and set off 100 years of internal chaos.
The current China story is like that of Japan 2 decades ago - capital miss-allocation, enormous opaque debts and a property bubble about to burst.
We expect a full blown Chinese economic collapse by 2020.
4. Europe has a Triple Dip Recession
Incredible in 2015 Europe will have its third recession in 7 years.
If this doesn’t shake up Germany nothing will. Germany - the motor of the Eurozone economy - will fall into recession in 2015, as it struggles to find new buyers for its tools and machinery (as Chinese demand disappears and the embargos with Russia continue to bite).
There will also be another chapter in the Eurozone crisis. Greece will default again on its debt in 2015 and Italy may find it difficult to roll its gargantuan government debt. The wider Eurozone economy is becoming mired in an endless period of stagnation - high unemployment, low growth and threatening deflation. Its prospects are weak over the next few years.
None of this applies to the UK. Britain was the fastest growing G7 large economy in 2014 and this will continue in 2015. Sterling will continue to strengthen on the back of this strong economic performance and likely exceed 1.30 to the euro for the first time since the global economic crisis.
The main threat to the UK’s growth rate is a self-inflicted wound over its potential withdrawal from the EU - still the world's largest trading block.
5. Technology and Science continue to advance
Ironically, against this backdrop of global economic volatility and geo-political tension, the larger human story is more positive than ever.
On many important fronts – science, medicine, technology, and communications – we are making huge strides and pushing back our frontiers all the time. A gigantic wave of global technology start-ups is testament to the drive for creativity, proposing new ways to solve the world’s problems.
Life expectancy will continue to power ahead in 2015 (growing at an amazing rate of 3 months per year). Infant mortality, crime rates and levels of extreme poverty will all continue to fall globally next year.
The birth rate has decline significantly in nearly every country, meaning the world’s economy will stabilise mid-century at approximately 9 billion people. The challenge for mankind is to provide food, education and employment for the world’s colossal population, against a background of commodity scarcity and climate volatility.
In 2015 we will continue exploring the furthest reaches of our Solar System, from private manned space flights, to the search for life on Mars, to landing on comets, the opportunities for Off-Earth exploration are growing all the time, as the rate of scientific advances escalates.
During the summer of 2015 mankind will reach the very edge of our Solar System for the first time, when NASA’s New Horizons spacecraft passes Pluto. This is an astonishing achievement and a landmark for our species.
Conclusion
While 2015 may prove to be a turbulent year for the global economy, it will also be the 70th anniversary of the end of World War Two.
The world in 2015 will be a far more peaceful and prosperous place than it was in 1945.
The challenges we will face over the next year pale in comparison with the utter decimation the world faced only seven decades ago.
Global Perspectives provides consulting, research and development to the asset management and alternative investment & industry. These services include software implementation, product and project management, as well as regulatory and operational consulting. Previous clients include leading asset managers, service providers and software vendors throughout the investment fund industry.
Global Perspectives was founded in 2011 and is based in Dublin and London, with existing clients located throughout Europe and North America.