Look at the news headlines from the last few weeks and you might think that the global recovery is over. From the collapsing oil price to the emerging market slowdown, euro area deflation and geopolitical risk, there's plenty to worry about. The most timely global activity data, the Purchasing Managers' Indices, suggest that the pace of global activity slowed in the fourth quarter of last year. And in a classic sign of nervousness, investors have been dumping equities and buying government bonds.
So given these signals, why do we think that 2015 will be a year of reasonable growth, with global activity accelerating?
This is a big subject and this week's Monday Briefing is, therefore, longer than usual. Before we examine what could go wrong we look at the three key reasons for our optimism: cheap money, cheap oil and a resurgent US economy.
First, cheap money. Interest rates in the Western world are rock bottom and credit is cheap and plentiful. Central banks have responded to lower inflation and growth jitters by signalling that credit will stay cheap for longer. The European Central Bank is likely, finally, to undertake Quantitative Easing. Despite strong growth in the US and UK, the US Federal Reserve and the Bank of England have backed away from early rises in interest rates. Markets are assuming interest rates will stay lower for longer and this is pushing down the cost of borrowing for corporates and consumers. 30-year mortgage rates, the benchmark measure of housing finance for the US, have fallen from 4.9% to 4.1% in the last 18 months. Cheaper credit will provide a boost to global activity in 2015.
Second, cheap oil - and other commodities. Financial markets worry that plunging oil prices are the canary in the cage signalling a downturn in global growth. Yet the International Energy Agency reports that global oil demand has risen, not fallen, last year and that demand growth will accelerate in 2015. We think increasing supply, caused by OPEC's insistence on maintaining output in the face of sharply higher US oil production, has been the primary driver of lower oil prices, not weaker demand. Over the last year, the oil price has fallen 53%, natural gas prices 30%, copper prices 17% and agricultural prices by 4%. These declines are feeding into lower bills - and rising spending power - for Western consumers. Falling commodity prices have hit growth in commodity-producing nations, including Russia and Saudi Arabia. But they boost...