With many of today’s economic trends reminiscent of the 1980s and 1990s, we are looking at a “back to the future” scenario for the global economy, says chief economist Dr Nariman Behravesh of IHS.
“Once again the US is a locomotive of global growth, the dollar is resurgent and US oil production is set to be the highest in the world,” he said at the World Economic Forum in Davos, Switzerland.
“Everyone right now is talking about the impact of the oil price plunge,” Behravesh says. “While clear winners and losers are being created, the net effect will be positive as roughly $1,5-trillion in wealth is transferred from producers of oil to consumers of it. This will translate to an additional 0,3 to 0,5 percentage points to world growth.”
As a point of reference, the 67% drop in oil prices in 1985 and 1986 was followed by a global boom. While three decades later the global environment is different, and a boom may not be in the offing, the big drop in oil prices will help growth.
“Despite multiple divergent trends, global growth is likely to accelerate a little in 2015,” he says. “Falling oil prices and more stimuli from key central banks will boost global growth in 2015 to 3% from 2,7% in 2014.
“The divergence in the performance of the big emerging markets is getting wider,” Behravesh adds. IHS expects the Russian economy to contract by 4% this year and the moribund state of the Brazilian economy to continue.
On the other hand, growth prospects in emerging markets such as India, Indonesia, Poland and Turkey look bright. India in particular looks very promising, with growth rates that could exceed that of China in the next few years.
US growth will remain solid, despite weakness in other parts of the world and plummeting oil prices. The US economy should be able to grow by 3% in 2015 without too much trouble. “Strong domestic demand growth will, as it has in the past, provide a strong foundation and buffer for the US economy,” Behravesh says.
A Greek exit is a low-probability scenario, which, if it happens, will not derail the Eurozone recovery. Even if Syriza wins the upcoming Greek snap election, the probability of Greece leaving the Eurozone is less than 20%.
If such an exit does occur, the contagion effect for the rest of the Eurozone will be small, given the ECB’s promise to do “whatever it takes” to prevent a financial meltdown.
