In 2014 the American economy showed solid growth which, though its recovery from the 2008 crisis has not been fully accomplished, enables us to forecast a continuity of this expansion in 2015. By contrast, the Eurozone still looks trapped in a deflationary trend which may cause economic stagnation in 2015. China is showing problems of overcapacity, instability of its financial system and less than expected exports that will limit its 2015 increase of the GDP to around 6% - much less than in the past. In summary - among the three major potential locomotives of global demand only America will be a strong driving force.
This seems to confirm the "slow recovery" scenario projected by the IMF in October 2012 which says that 2018 will provide the first window of opportunity for a full and diffused global recovery after the shock of 2008. Is this good or bad news? It's half and half. The good news is that the global economy is moving up, though very slowly, rather than stagnating. The bad news is that the very slow pace of growth will increase the vulnerability of the overall system.
The problem is as follows: this recovery has been driven by a huge amount of liquidity injected into the market by the Central Banks since 2009, with this peaking in 2013 and 2014. Unfortunately, this flood of liquidity found, and is still finding, too many barriers to a full transmission of the monetary stimuli to the "real economy." This means that there is a gap between the financially driven recovery and real economic growth. This gap might affect the stock market in 2015 making it too volatile.
A further problem will be created by the Federal Reserve's need to reduce its balance sheet - to shrink the overall amount of monetary mass in order to keep the inflationary trends that are likely to occur in the American economy, if it continues to grow at its current rate, at bay. The European Central Bank (ECB) and the Bank of Japan (BoJ) have tried to compensate for this by expanding their own balance sheets. The BoJ has already made hyper-expansive manoeuvers and the ECB has announced a reflationary measure of around 1 trillion euro. However, the disinflationary obsession of Germany might reduce the ECB contribution to the global "pump of capital" and the Japanese approach seems to be increasing financial instability whilst expanding the global amount of circulating capital.
These uncertainties could lead to a devaluation war among currencies. But the most dangerous factor is that a strong dollar might make it more difficult for emerging economies to sustain their debt in dollars, thereby risking opening a season of devastating defaults. The Federal Reserve will try not to generate shocks for this reason, but the Eurozone and China might suffer more as a result in which case the dollar will remain weak.
Can we find and, as market actors, advocate an idea of how to avoid global destabilization? Perhaps a monetary agreement among the G7 (plus China) might help in providing global markets with both the right amount of liquidity and the confidence boosting guarantee of stability based on cooperation. Confidence will be the key factor in 2015, and beyond.
