Economic Update April 2015

The three major themes of Oil, the Euro and Conflict continue to dominate the outlook for the world’s economy.

The oil price seems to be stabilising, subject to occasional shocks that result in blips. I suspect it has a little further to fall from current levels of $60-$50.

The Euro disturbances – especially in Greece – continue to bubble away.

Continued conflict in the Middle East is probably providing some level of support for the oil price at its current levels and in the unlikely event of peace breaking out I would expect oil prices to fall again. A more fundamental impact on several major economies is Russian efforts to destabilise Eastern Europe and the Baltic states.

In Britain, there’s considerable nervousness at the possibility of a Labour led government especially if (as seems likely) it is dragged further to the left by the need for support from the Scottish nationalists. The alternative of a Conservative led government generates concern over the promised EU referendum, but that is concern on a smaller scale.

In economic terms, if a Conservative government is returned, expect growth in the 2.8 to 3% range, possibly with a slowdown in the run up to the referendum. I’d also expect a second Scottish referendum and a very likely break-up of the UK. In economic terms that is most likely to be good for the “rump” of the UK, very bad for Scotland but might well be 7-8 years away.  I’m expecting enough concessions from the EU that Cameron can campaign for a vote to stay in, which he will win, so that the disruption of an exit is avoided.

If we have an alternative election result at best that will create an unstable government and at worst a heavily socialist regime. That will be bad of business and the economy, although the effects will take time to show. Growth rates falling back to 1.5 – 1.8%

Europe is not at all homogenous. France is still in trouble (zero growth) and I see few signs to give me hope for recovery, Germany continues to outperform (2-3%) although Putin’s antics to the east give some cause for concern. Italy seems to be on a slow road to recovery (1.5 – 2%) although the pace of reform is glacial. Spain is making good progress (2%), Ireland is well ahead (2.5%)

The US, despite the recent jobs report, has few barriers to sustained & continued growth and should see rates around the 3% mark.

China continues to be a powerhouse despite the consolidation of power and the anti-corruption drive, both of which are slowing the breakneck pace of the last few years. Growth rates of 7% or so.

Russia is in recession and likely to remain so. Removal or weakening of the sanctions imposed by the EU will help, but the oil price scenario is not helpful and neither are Putin’s political tactics with the former soviet states.

In India there are some grounds for optimism. The (relatively) new government is making some structural reforms and investment in much needed infrastructure, but it is a long slow road. Recent adjustments to the reported statistics have just muddied the waters but growth rates similar to China’s seem likely.

Latin America: the shining bright spot in the region is Mexico with growth rates of 2.5% climbing to 4-5% over a 2-3 year period. Elsewhere in the region, Oil dependent economies and political instability combined with anti-business rhetoric and legislation suggest zero to weak growth.

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