Euler Hermes 2015 economic outlook: No fabled happy ending


SÃO PAULO, Brasil – 11 FEBRUARY 2015 – Despite weak demand and ongoing geopolitical uncertainty, Euler Hermes, the worldwide leader in credit insurance, forecasts a slight increase in 2015 global economic growth to 2.8% from an estimated 2.5% in 2014. At the same time, the company’s latest Economic Outlook report points to a recovery which is far from over.

“Consumers in post-recession countries are slowly returning to trend levels, but their caution is unlikely to wane in the near term,” said Wilfried Verstraete, chairman of the Board of Euler Hermes. “In Europe, the European Central Bank is determined to break the vicious cycle of anaemic demand and stunted investment, but the pass-through to the real economy, companies’ turnovers and profits will take time.”

Last week the European Central Bank (ECB) announced that in March 2015 it will begin purchasing investment grade bonds in the secondary market issued by the Eurozone governments, agencies and EU institutions. The decision is late compared to the U.S. Federal Reserve or the Bank of England, and Euler Hermes expects limited positive impact on the region’s real economy: +0.5 percentage points of GDP growth and +0.3 percentage points of inflation over the next 12 to 18 months. Viewing the ECB action as part of a multi-year recovery scenario, Euler Hermes estimates that the Eurozone will grow by 1.1 percent in 2015 – the highest in four years.

As for Brazil, the government’s target is to reach a primary surplus of +1.3% of GDP in 2015 and +2% in 2016-2017. Along with huge ongoing investment programs, these policies are a welcomed first-step to address macroeconomic imbalances. However, they will also weigh on overall activity levels, at least in the short term. Euler Hermes estimates that the investment deficit accumulated by the Brazilian economy over the past 10 years has reached $1.1 billion, while expecting real GDP to grow by only 0.5% in 2015, after stagnating in 2014.

In spite of the anticipated first interest rate increase in a decade and more selective trade financing (domestically and abroad), U.S. growth will expand by 3.1% in 2015, buoyed by higher employment, increased consumer confidence and low energy prices.

“In the U.S., the additional liquidity created over six years, supporting asset prices and boosting the global economy, won’t disappear soon,” noted Ludovic Subran, chief economist at Euler Hermes. “The goose will keep laying golden eggs, as long as they don’t kill it by raising rates too aggressively.”

U.S. inflation is likely to remain close to the 2 percent target since slack will remain in the labor market (the U.S. should have 5-10 million more jobs at this stage of the recovery despite rising employment), keeping wage pressures at bay. A weak global economy, a firm U.S. dollar and the fall in energy prices will also put downward pressure on inflation.

In China, growth is set to decelerate to 7.3%, the slowest in 25 years. The country will continue to focus more on domestically-driven growth and, crucially, reducing over-investment and excess capacity.

Emerging economies will expand slightly to 3.9% in 2015, after 3.8% in 2014. The report highlights that the recent dramatic drop in oil prices to around $50 per barrel would provide relief to many countries with high energy bills such as India and China, while exporters – the Gulf countries for instance – will have to adapt to lower revenues and be selective about investments and public spending.

“We continue to see political hotspots in the emerging world. Political risk can reverse investment flows and hit the ‘pause’ button on private sector development for quite some time, as proven in the Ukraine and Russia. They have been hit by a perfect storm: the drop in oil prices, economic sanctions, capital flight and a near-halving of the rouble,” said Subran.
Regional growth rates (%)
 Sources: IHS, Euler Hermes