Global upswing to continue in 2015

• Data releases likely to keep markets interested throughout festive period
• Falling oil price expected to boost global growth in 2015
• US and UK policy rates set to rise in 2015, while ECB could embark on QE in Q1

Despite the upcoming seasonal slowdown in the pace of new economic data there are still several noteworthy releases for markets to chew over, especially given the backdrop of the current softness of oil prices. For the US, these include the third estimate of Q3 GDP, which we expect to be revised upwards to an annualised 4.3% on the back of stronger household spending and inventories, as well as November PCE inflation, durable goods orders and several housing market indicators. Elsewhere, euro area money supply figures for November and consumer confidence (Dec), as well as December Chinese manufacturing PMIs will be watched for signs of underlying momentum. On the domestic front, the final estimate of UK Q3 GDP is expected to show a 0.8% quarterly rise.

Markets will take the opportunity to take stock of several contrasting impulses on global activity which are likely to linger well into 2015. On the downside are deflationary pressures in the euro area, intensified geopolitical tensions, and a challenging outlook for several important emerging markets. However, robust US activity, as well as the fall in crude oil prices, which we see as being primarily supply-side driven, are helping to support global growth. The net boost to worldwide spending arising from the decline in oil prices, which is akin to a tax cut for oil importers, is expected to raise global growth to 3.4% in 2015, after a projected 3.2% outturn this year. In particular, growth will rise in the major developed economies, while momentum slows across emerging markets, notably in China. Russian GDP is expected to contract by 3.6% next year.

The Fed and BoE are both expected to raise their policy rates during 2015. The recent fall in oil prices is anticipated to push headline inflation in both the US and UK below 1% over the next few months. However, both central banks are likely to focus on the robust pace of economic growth and falls in unemployment as signalling a rapid narrowing in the amount of spare capacity. This week’s FOMC policy statement and Chairwoman Yellen’s accompanying press conference have reinforced our expectation that the Committee is likely to start raising its key rate in June. Recent pronouncements from the MPC have emphasised the mounting downside risks to UK activity, particularly from the euro area. However, we do not expect these headwinds to be strong enough to significantly slow growth. Consequently, amidst signs of a tightening labour market and a long-awaited pickup in wage growth, we anticipate a 25bp rise in the Bank Rate in August, slightly earlier than the current market consensus. In both cases, we expect the rate hike to be flagged well in advance.

We expect the ECB to opt for QE in an attempt to stave off a deflationary spiral. Against a backdrop of persistently weak euro area growth and falling oil prices, the risks of euro area inflation, currently at 0.3% y/y, turning negative over the next few months are rising. This could entrench inflation expectations below the level consistent with the ECB’s inflation target of “close to but below 2%” which could further undermine growth. A recent flurry of ECB stimulus measures, such as the TLTRO lending facility, purchases of covered bonds and asset-backed securities have, so far, had less-than-hoped-for impacts on boosting demand. In the absence of a rapid improvement in the data, which looks unlikely, we expect the ECB to embark upon a full-blown sovereign QE programme as early as 2015Q1.

• We wish all our readers a joyous festive season and a prosperous New Year.
• Our next Weekly will be published on 2 January 2015