■ Global growth is back around its long-term average, driven mostly by the US and the UK, while the eurozone and some major emerging markets are still trailing. We expect that global growth will gain momentum in the course of 2015.
■ Better growth will return as the previous years' fiscal drag, particularly in the eurozone, is coming to an end, and households and businesses in the US, Europe and most emerging markets are now benefitting from substantially lower oil prices. Moreover, a "freezing" of the Russian/Ukrainian crisis will support a rebound in broader sentiment indices across Europe.
■ We expect the US to continue to lead the global recovery. We see US growth accelerating from 2.3% in 2014 to about 3.0% in 2015, while the eurozone should accelerate from 0.8% to about 1.0%. In the eurozone the weaker exchange rate and lower oil prices will play a key role in driving the recovery in economic activity.
■ Italy will return to positive growth after three years of contraction. We expect GDP to expand by 0.5% in 2015 (after -0.4% in 2014) and by 1.1% in 2016 respectively. Italian exports will benefit from a weaker euro and a moderate recovery in global demand. This will support a gradual pick up in investment starting from the second half of next year, once the uncertainty dissipates and confidence improves more convincingly. In turn, the recovery in the labor market will gain more traction at the turn of the year, with employment growth accelerating, even if unemployment will decline very slowly. This will underpin the ongoing recovery in private consumption which has already started to benefit from a more growth-friendly fiscal stance and lower inflation. As a result of the government's less restrictive fiscal stance, we see the deficit declining slowly in 2015 (to 2.8% from 3.0% in 2014), while better growth prospects will lower the deficit to 2.4% in 2016. Accordingly the debt-to-GDP ratio will continue to rise next year and start declining in 2016.
■ On prices, the sizable output gaps along with the significant decline in commodity prices already seen means that, on our numbers, headline inflation throughout most of the OECD area will likely remain severely compressed for at least another year.
■ World's major central banks will remain accommodative, but with some differences. We think the Fed will lift off around mid-2015, but the overall US monetary policy stance will remain accommodative throughout 2015. Meanwhile, the ECB and BoJ will accelerate their balance sheet expansion at least through mid-2015. We expect the ECB to broaden their purchases to additional private sector assets during early 2015, while the move into sovereign debt remains a close call largely dependent on developments in inflation expectations and the euro. On balance, we think the eurozone recovery will be strong enough and the euro weak enough to avoid de-anchoring of inflation expectations, thereby leaving the ECB on the sidelines - constantly threatening, but never actually triggering sovereign QE.
■ All this suggests that one key characteristic of 2015 will be dollar strength against most other major currencies as US real yields continue to rise. We think the trade-weighted dollar may appreciate by about 6% during 2015. The trade-weighted euro should continue to depreciate, "guided" lower by the ECB, probably by about 4%, which leaves us with a EUR-USD forecast of about 1.15 by end-2015.
■ Better growth and accommodative monetary policy, combined with not-excessive valuations, should be good for equities and credits and should contribute to drive sovereign bond yields moderately higher at the long end. We expect the rise to be gradual and to take place mainly during the second part of the year. It is also likely to be a good year for peripheral sovereign credits. In this environment, most non-commodity-dependent emerging markets should also do well.
■ We see the key risk to our 2015 outlook in the form of the Russia/Ukraine conflict. We will also carefully watch political developments in several Eurozone peripheral countries running up to elections with uncertain outcomes, particularly Spain and Portugal. Also Greece faces an uncertain political outcome as we approach the presidential election.
■ Outside the eurozone, elections in the UK in May are likely to significantly change the composition of the UK parliament towards an anti-European (or an EU-skeptic) majority, which will considerably raise the probability of an in/out referendum - with an uncertain outcome - by 2017. Outside Europe, China's handling of its gradual slowdown with a substantial credit bubble deserves close watching, as does the highly experimental policy choices in Japan.
Milan, December 9, 2014
