This article will briefly examine the economic performance of a few of the world’s major economies over the course of 2014 and highlight a few potential issues facing these economies in the coming years.
The Eurozone
2014 began promisingly for the Eurozone economies with an annualised growth rate of 1.2% experienced in the first quarter. This is not exceptional, but it illustrates that progress is being achieved. This growing confidence in the stability of the recovery was highlighted when the Greek government was able to borrow at a rate of 6% rather than the 40% available when fears of default were prevalent.
The post 2008 recovery is, however, yet again in doubt as growth slowed in the final three quarters of 2014 fuelling worries of a ‘triple dip recession’ and growing fears regarding deflation emerged. Unfortunately these fears were materialised and data released at the beginning of 2015 showed that deflation occurred during December 2014 with consumer prices falling by 0.2%. These deflationary pressures- stemming from low growth, strict austerity measures and tumbling oil prices- represent a potential disaster for the Eurozone recovery and its future.
The European Central Bank undertook expansionary monetary measures during the year including lowering interest rates to 0.05% but faces ever increasing pressure to do more and may be left with no choice but to embark on a programme of significant quantitative easing.
United States of America
In the first quarter of 2014 the USA experienced an annualised contraction of 2.9% which was much larger than expected. This owed partly to the difficult winter of 2013 resulting in consumers delaying consumption meaning firms reduced production and postponed investment. The second and third quarters were, however, much more impressive with an annualised growth rate of 5% experienced in the third quarter. The Economist highlights that ‘in four of the last five quarters GDP has increased by 3.5% or more. The American economy hasn’t strung together five quarters like that since the late 1990s’ and also highlights that unemployment is shrinking at its fastest rate since 2006 currently standing at 5.8%. Some of this impressive growth can however be explained through the contraction of the first quarter.
The Federal Reserve under the leadership of Janet Yellen is likely to increase interest rates at some point in the next year despite a very low level of inflation in an attempt to return the economy to a normalised position and it will be interesting to see how the US economy responds to these changes.
China
The gradual slowing of China’s economic growth rate continued in 2014 with a growth rate of around 7.7%. Although still very rapid this growth is lower than the rates experienced over the period 1990-2010 and is reflection of the changing nature of the Chinese economy. There are fears that China’s slowing growth may have a knock on effect on global GDP growth with the OECD arguing that ‘a two-percentage-point decrease in the growth of Chinese domestic demand for two years would reduce world GDP by 0.3 percentage points a year.
In the autumn of 2014 China experienced popular pro-democracy movements in Hong Kong following announcements of proposed changes to the electoral process. These protests gained popularity and spread to Macau and serve as a reminder that whilst China may appear to be handling the slow-down relatively well it still faces major domestic, political issues as it attempts to balance economic freedom with political control.
Russia
Russia’s oil dependence has always made it vulnerable to volatility in commodity markets and this has been evident in the latter half of 2014. Russia has been stung by the almost 50% reduction in the price of oil. Oil exports represent almost 66% of Russia’s total exports and thus this collapse in oil prices has had devastating effects both for revenue and on the currency with the rouble falling by around 25%. This was met with substantial interest rate increases in an attempt to prevent further depreciation.
Russia’s involvement in Ukraine has damaged relations with the west and the imposition of sanctions have contributed to lower growth. Growth has fallen in the first three quarters from 0.9% to 0.7% pushing Russia closer to crisis. There are increasing calls from commentators that Russia, now more than ever, needs to embark on a sustained and committed process of diversification in order to reduce its dependency on oil. There have also been calls for Putin to replace Prime Minister Dmitry Medvedev with someone with a better economic understanding to oversee this process.
Worryingly for Russia’s economy the price of brent crude has fallen below $50 per barrel in early 2015 for the first time since 2009 highlighting the gravity of the situation facing Russia. Estimates suggest that to avoid recession Russia needs the price of oil to be close to the $90 per barrel mark but worryingly for Putin and his colleagues forecasts suggest that the price may be closer to the $80 mark. The Economist argues, however, that if the situation in Russia becomes desperate sanctions are likely to be eased suggesting the future may not be as bad as it appears.
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