Quarterly Economic Update – Q4 2014

This commentary seeks to provide guidance over a 3 -5 year timescale.


Overall, Europe is in poor economic health. The European central bank is now providing QE and still lower interest rates in an effort to stave off deflation. The chances are slim….it seems very likely that growth in Europe will be very limited over this period.

Pressures are both internal with the Latin economies yet to resolve their recessionary problems and external, with the southern economies hampered by events in North Africa whist to the East the Ukrainian crisis and Russian ambitions are a real cause for concern.

The bright spots are Scandinavia and Germany, but even in these economies there are significant headwinds. Their main markets (the rest of Europe) are showing no signs of growth and may still be in recession.


The recovery seems to be well established across many fronts and the outlook is very positive. House prices, which were such a concern for some commentators earlier in the year, seemed to be cooling off or stabilising a little, and the Scottish referendum has removed a vast set of uncertainties.

There are still some puzzles in the statistics, most notably over productivity and output levels.

Public expenditure is still on a downward path and is likely to remain so – whichever flavour of government we have from 2015.

Inflation is at a low point, so there is little pressure on interest rates to rise. I expect to see the first moves to increase interest rates in the summer of 2015, although the Bank of England could choose to move rates up as early at Q1 2015.

The weak economies of Europe on our doorstep and our relatively poor performance as an exporter remain as constraints on growth so a rate of 3 to 3.5% will be an exceptionally good performance.


Once again, the US Republican party seems to be swinging to the right, with news that Ted Cruz is a favoured candidate. It seems unlikely that the republicans will mount a sensible challenge to Hillary Clinton at the next election in 2016. In the business world, the lack of political meddling is good news. The shale gas story continues to drive the US economy, with business “re-shoring” manufacturing on the back of cheaper energy. Unlike Europe, the US demographic profile is favourable with a younger, educated, upwardly mobile population, many of whom are of Latino origin. Growth rates of 3% in 2014 and possibly 3.5% from 2015-2016.


The Wold Cup and the Olympics may give a temporary boost to the economy, but it will be minor.

This is very much a story of unfulfilled potential, but until the infrastructure is in place and the social divides are narrowed it seems very likely to remain unfulfilled. Growth rates seem likely to be in the 2-3% range.


Putin’s antics in the Ukraine have resulted in economic sanctions and made a recession in 2014 almost certain.  The heavy reliance upon selling oil and gas to the west is hampered both by the political upheaval and the transformation of the US from a net consumer to a net exporter. Russia is seeking to replace the western oil markets by looking south and east to China. It is difficult to see much growth in Russia in the next few years.


Narendra Modi of the BJP party has been elected on a platform of economic reform, and has approved a numbers of defence related infrastructure projects. That’s a decent start but many problems remain in the civilian world.

Growth rates of 4-6% in the forecast period.


The disturbances in Hong Kong aside, the big question over China remains the size of the shadow banking sector. Unregulated or lightly regulated lending has the potential to create instability in the mainstream financial services sector, with consequences that we in the western economies know only too well.

It’s my view that the Chinese authorities will manage the reduction in the shadow sector, and although there will be some casualties they will be relatively minor.

Hong Kong’s political disturbances are likely to come to a pragmatic soloution.

Overall, very positive with growth in the 7-9% ranges.

 “Greater China”

I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it.

The big risk country is Thailand, following the army coup, but there is a history of the army taking power for a few years and then reverting to democracy. In the past, the king has proven to be a stabilising influence but on this occasion he has been very quiet – perhaps through old age and / or ill health.

Myanmar, the former Burma seems more stable in this quarter than last, but it remains only a few months ago that it was a state ruled by the army.

Growth rates could be exceptional at 7 – 10%


Some territorial disputes in the South China Sea have raised their heads again. China, Japan and Vietnam all lay claim to some islands, but of course it is the natural resources surrounding ( and beneath) the islands that is of interest. That’s most likely just a side show.

Sclerotic corporate structures continue to inhibit growth.  The worlds’ 3rd largest economy will continue to grow slowly.


The main stories in this region remain political turmoil and civil insurrection in Syria, Iraq and Egypt.

The Gulf States have significant natural resources, but Middle East oil & gas is becoming less important to the world economy as Shale Gas, improved efficiency and new discoveries reduce the world’s reliance on the region.

It is difficult to be optimistic for prospects in this region.


The Aussies had a good run up until the end of 2012, but I think they have more reasons to be optimistic about the cricket than about their economy for the next few years.

© Tim Luscombe Oct 2014

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