Weekly Economic Briefing

Politics in the driving seat

16 December 2014

Global Overview

  • Politics and policy will continue to play a fundamental role in driving the global economy in 2015. Political risks remain alive and well but if these can be avoided there are broader opportunities for policymakers to support growth.
  • In the US and UK, central bankers can probably start shifting their economies away from ultra-loose policy without endangering the recovery. The recent decline in oil prices reinforces our view that Fed tightening should start in June.
  • Fears over a Greek exit from the Eurozone have returned as the prospect of a new government looms. ‘Grexit’ would be painful but we think that there are sufficient incentives for both sides to agree on a more constructive outcome.
  • Abe’s election victory will cement his mandate for economic change. However, he must use this political capital to implement growth-boosting structural reforms to support the economy in the long run.
  • China is finding it difficult to strike a balance between stabilising growth and achieving reform. It may have to tolerate weaker short-term activity to ensure long-term stability. Meanwhile, oil prices pose a threat to Russia’s resilience under a sustained conflict.
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US

Lower oil prices are positive for the US, with the boost to households and businesses outweighing the hit to producers. The Fed looks set to signal more explicitly that rates will rise soon.

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UK

Market pricing for Bank rate has fluctuated dramatically over 2014. Further swings are coming if we are right in our view that the Bank of England will tighten earlier than
markets expect.

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Europe

Presidential elections in Greece have raised the spectre of Grexit. We expect Greece to stay in the Eurozone but fraught negotiations will cause headaches for politicians and the ECB.

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Japan

Abe’s ability to garner votes does not mean that the Japanese public has converted to his deflation-fighting crusade. Higher growth and rising incomes will be needed to win further support.

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Emerging Markets

China’s policy balancing act and Russia’s prolonged march into crisis will be two of the most compelling issues of 2015. As Russia prepares for a sustained conflict, oil prices could be the tipping point.

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Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

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