2015 – The Year Ahead
It would be hard to imagine a more volatile and unpredictable year than the one we’ve just left, and to some extent we enter 2015 with many questions to be answered.
From a financial markets standpoint, the prospect of major political and economic turmoil means that price volatility is almost guaranteed. The major disparity seen between weaker regions such as the eurozone and Japan, compared to the stronger performers such as the UK and US, will be front and centre given the divergent paths of monetary policy between the two camps. With that in mind it is worth taking a look at what could be some of the major themes throughout 2015.
Political instability
From a political view, the focus will largely be on European elections, which given the rise of anti-austerity and anti-EU sentiment means that there will be a push towards more isolationist policies by the dominant parties, as a means to appease the clear unrest seen throughout some of the major economies.
The UK election in May is no doubt going to be dominated by the question of how far both Labour and the Conservatives will go towards the anti-immigration rhetoric touted by UKIP and Nigel Farage. Teresa May’s announcement that international students will be ejected from the country immediately after finishing their qualifications highlights this, and points to a crude and reactionary policy which is focused upon appeasing voters despite essentially leading to a brain drain from UK institutions.
However, given the fact that the UK seems to be headed towards a referendum upon EU membership, the UK’s ability for options which can limit mass immigration without leaving the union will be important as a means to deter people from voting in favour of the drastic move to the exit doors.
Greek election
On mainland Europe, the Greek election on 22 January is the first and one of the biggest of multiple flashpoints which could greatly affect the structure of the eurozone as we know it.
The rise of the anti-austerity Syriza party means that the single currency region could be a much more confrontational place very soon. Given their promise to write-down debt and alleviate the pressure of the austerity measures which were implemented as a prerequisite to gaining funds, there is little chance that the likes of Germany will want to lose out on both fronts. As a result, Angela Merkel has already been warning voters through an apparent ‘leak’ that the Bundestag have been preparing for a Greek exit.
For the most part though, it is highly unlikely that of all countries, Germany would want to initiate the breakup of the eurozone, yet should Syriza get into power, it would without doubt be a bumpy road ahead, and the threat of contagion throughout the eurozone would be critical. With the likes of Spain and Portugal also due for elections this year, we are expecting to see political instability play a significant role in 2015.
Oil price slide
The incessant fall in oil prices through the second half of 2014 gained in importance once it became clear that rather than simply being a result of heightened supply, it was also being driven by an agenda from Saudi Arabia, who plan to reduce prices to a level which would make many of the worldwide drilling and fracking operations economically unviable.
This means that we could see global supply come down eventually, but that could take time, with much of the investment in drilling having been assigned for a while yet. With Russian oil output has hitting a post-Soviet Union record high, and Iraqi oil exports at their highest levels since 1980, there is significant doubt as to whether the falling prices are going to force output lower.
The current trend clearly shows that those countries outside of OPEC are deciding to actually increase their exports to compensate for a lack of earnings at previous levels, and given that restrictions upon Iranian exports could be lifted at some point in 2015, we could yet see another major oil producer hitting the markets with major supply.
The impact of the recent falls in oil prices are far-reaching, to say the least. There are mixed feelings for many, with the energy sector no doubt feeling the brunt of this shift and subsequent job losses are likely to follow once companies refrain from drilling, due to the loss of profitability at lower prices. However, on a macro level, it is less clear, with economies reliant upon oil exports set to lose crucial tax revenues while net importers should gain from the lower prices. However, aside from that, there is a more widespread boost to the rest of the economy, where lower oil and gas prices will lead to a greater degree of disposable income to be spent by consumers. Therefore retail firms will no doubt see 2015 as a massive opportunity to boost sales for luxury items and experiences such as holidays.
Lower oil prices also mean that the costs of production will be cut significantly and this can only be a good thing for everyone. While producers will no doubt pass a lot of this saving on, it is likely that they will also take the opportunity to increase profit margins and so transport-reliant industries are set for a particularly good year.
Inflation and its impact on central banking
The influence of these falling oil prices are no doubt going to compound the problem of disinflation that has been felt around the world. No more so than in the eurozone, where markets are still reeling from the announcement that CPI fell to -0.2% in December 2014. This move into deflation could be the first month of many such announcements, and puts pressure on ECB president Mario Draghi to finally introduce a fully-blown quantitative-easing programme.
The fact that deflation has finally arrived is hugely significant, but perhaps the most important question is when the eurozone will move back into inflation. With oil prices tumbling, the pressure will no doubt be downward for global price growth and this is going to have a profound effect on central bank policies.
The ECB appears to be on the cusp of a round of fully-blown quantitative easing, which is likely to continue the equity rally seen throughout 2014. However, the delaying of interest-rate hikes from the likes of the US and UK is likely to be just as important, leading to a continued emphasis on credit and investment over savings across the western world.
The impact of current inflation levels hasn’t yet taken hold within the likes of the UK, US and China, to the same extent as it has within the eurozone. However, the signs are that the impact of falling oil prices will invariably catch up with inflation data in the end – and once it does, there is little doubt that the central banks will have to take heed and act accordingly. Given that the norm for central banks is to see price stability as their core mandate (this typically means price growth around 2%), the move lower in prices will no doubt have a massive impact upon the degree of monetary policy seen globally.
Read the full report at Alpari News Room
