Top Five Economic Risks for 2015

As we head into 2015, the overall health of the global economy is better than at any time since the global economic crisis began in 2008.  Nevertheless, the global economic recovery that has been underway in recent years remains very fragile and much weaker than that of recoveries that took place in the wake of previous economic crises.  Looking at the coming year, ISA believes that there are five primary risks facing the global economy in 2015, each of which has the capacity to stall the current recovery in its tracks.

 

Another Recession in the Eurozone

As has been the case over the past five years, Europe’s struggling economies are posing a major threat to the rest of the world.  While European economies outside of the Eurozone have performed much better over the past year, the Eurozone itself remains mired in stagnation and is facing the real threat of deflation.  As 2015 approaches, domestic demand levels in the Eurozone remain almost 5% below 2008 levels, and there is little hope for domestic market growth next year.  This leaves the Eurozone increasingly dependent upon exports to drive growth in the coming year at a time when many key export markets remain weak themselves.  H, growth in the Eurozone will remain very low in 2015 and yet another recession cannot be ruled out.

 

Russia’s Economy Collapses

International sanctions and collapsing oil prices are causing massive damage to the Russian economy.  In the coming year, these sanctions are unlikely to be lifted, and more sanctions could be added, as the crisis in Ukraine shows no sign of being resolved over the near-term.  In the meantime, Russia needs ever-higher oil prices to balance its budget, so the dramatic fall in oil prices in recent months has pushed the Russian economy to the brink of a recession.  In 2015, the Russian economy will fall into a recession and, if oil prices continue to fall, this recession could prove to be extremely severe, fueling geopolitical tensions inside Russia and along its borders.

 

China’s Slowdown Worsens

China’s economic slowdown has, thus far, occurred at a very slow and steady pace, enabling the Chinese government to manage the impact of this slowdown.  However, this slowdown could worsen in the coming year, as domestic demand growth may not meet expectations, while key export markets remain weak.  Already, many government officials in China have called for the country’s economic growth target to be lowered to 7.0% next year.  Should this prove too optimistic, unrest could begin to stir in China, while those economies that have grown dependent upon exporting their natural resources to China could be in for a rough year in 2015.

 

A Full-Blown Currency War

The strength of the US dollar and the weakness of many of the world’s other leading currencies could result in a full-scale currency war in 2015.  Such a currency war has been forecasted in the past, but policymakers have avoided falling into this trap on a number of occasions.  However, so many important currencies have weakened in recent months, that other countries (China, for example) may find themselves forced to weaken their own currencies in order to protect their export competitiveness.  If a race to the bottom commences, no one will win and the global economy will suffer the consequences.  Meanwhile, an even stronger US dollar would have grave consequences for exporters in the United States, hampering that country’s relatively strong economic recovery.

 

Oil Prices Fall Much Further

Oil prices have fallen by more than 40% in the second half of 2014 as a number of factors have coincided to drive down the price of oil.  Each of these factors is likely to remain in place in 2015, as oil production in the United States rises and demand in places such as Europe and Japan remains weak.  As such, without major production cuts from Saudi Arabia, the price of oil could fall much further in 2015.  While this would be a nice economic stimulus for oil importing countries, it would have a devastating impact on those countries that are dependent upon oil exports for much of their economic growth.  In particular, Russia, Iran and Venezuela would all face the prospect of an economic depression if oil prices fell by another 50% in 2015.