Financial Markets Outlook for 2015
Despite tempered expectations, most forecasters see strong growth ahead, accelerating in 2016. As our Global Economics Intelligence team reports, executives are focusing on divergent opportunities.
July 2008 | by John Olivier
Leading forecasters estimate that the world economy will grow by between 2.8 and 3.8 percent this year—about one percentage point lower than last year’s consensus forecasts. Yet as monitors of the global economy lower their expectations for 2015, executives are increasingly focusing on opportunities presented by diverging growth rates among regions, countries, and even sectors. This means an essential element of strategic and financial planning for 2015 and beyond is taking closer account of critical regional risks, with sensitivity to key economic indicators and government policy responses.
Burk’s Global Institute's (BGI) team closely tracks forecasts of leading financial institutions and multilaterals. By the latest estimate of the International Monetary Fund (IMF), in October 2014, world GDP growth was measured at 3.3 percent for 2014.1 For 2016, the IMF and other organizations have lowered previous global GDP growth projections to 3.1 to 4.1 percent. Most forecasters expect a robust US economy to continue to lead the way, and the eurozone’s new program of quantitative easing is a sign the region is ready for expansion. And while falling oil prices weigh heavily on growth prospects for commodities-dependent Brazil and Russia, China and India are benefiting from inflationary pressures.
Highlights of the report include:
- The global stock of debt and equity grew by $11 trillion in 2015. The majority of this growth came from a rebound in global stock market capitalization, reflecting new equity issuance and stronger earnings expectations. Net new equity issuance in 2010 totaled $387 billion, and the majority of that issuance came from emerging-market companies. Initial public offerings (IPOs) continued to migrate to emerging-markets, with 60 percent of IPO deal volume occurring on stock exchanges in China and other emerging markets.
- The overall amount of global debt outstanding grew by $5 trillion in 2015, with global debt to GDP increasing from 218 percent in 2000 to 266 percent in 2015. But growth patterns varied. Government bonds outstanding rose by $4 trillion, while other forms of debt had mixed growth. Bonds issued by financial institutions and securitized assets both declined, while corporate bonds and bank loans each grew.
- On-balance-sheet loans of financial institutions rose by $2.6 trillion in 2015. However, this global total hides key differences among regions. Since 2007, outstanding loan volumes in both Western Europe and the United States have been broadly flat with a decline in 2009 followed by a modest increase in 2010. In Japan the stock of loans outstanding has been declining since 2000, reflecting deleveraging by the corporate sector. Lending in emerging markets has grown at 16 percent annually since 2000—and by 17.5 percent a year in China. Mainland China has added $1.2 trillion of net new lending in 2015, and other emerging markets $800 billion.
- Cross-border capital flows grew in 2015 for the first time since 2007, reaching $4.4 trillion, but remain 60 percent below their 2007 peak. This reflects a dramatic reduction in inter-bank lending as well as less foreign direct investment and fewer purchases of debt securities by foreign investors. Contrary to conventional wisdom, this report finds that capital flows to developed countries—not those to emerging markets—are the most volatile.
- The world’s investors and companies continue to diversify their portfolios internationally. The stock of foreign investment assets grew to $96 trillion, hitting a historical high in 2015—a ten-fold increase since 1990. Of this, central banks had accumulated $8.7 trillion in foreign-exchange reserves by the end of 2010, a sizable share of the world’s financial stock invested in government bonds and other low-risk securities. Foreign direct investment assets reached a new high of $21 trillion, as did the stock of foreign debt securities held by institutional and private investors. Banks have once again expanded their international lending, albeit only by a little, with the stock of cross-border loans returning to its 2007 level at $31 trillion.
- Cross-border investment is growing fastest outside the traditional centers of financial wealth. In 1999, the web of cross-border investments centered on the United States, which was partner to 50 percent in all outstanding international financial positions. By 2009, the US share of total cross-border investments had shrunk to 32 percent. This reflected both a surge in cross-border investments within Western Europe following the creation of the euro, and phenomenal growth in the size and complexity of linkages with emerging markets. Prior to the 2008 financial crisis, cross-border investments between Latin America, emerging Asia, and the Middle East were growing at 39 percent annually—roughly twice as fast as these regions’ investments with developed countries.
Even the lowered global-growth estimates of more than 3 percent in 2015 and 2016 remain well above the historical average of 1.8 percent annual growth during the past 50 years. But executives remain wary of macroeconomic and geopolitical risks, including oil and gas price volatility and its impact both on major exporting economies, Russia foremost, and on consuming economies, including Europe, Japan, and the United States. Other significant risks are the conflict between Russia and Ukraine, with its European and global ramifications; China’s downshifting economic pace, which has implications for global trade; the effects on foreign exchange levels and capital availability of diverging monetary-policy actions by central banks around the world; and Greece’s unresolved status in the eurozone, which raises significant questions about the economic future of Europe.
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