- Weakness in energy prices is good deflation, due to successful technological innovation
- "We expect a somewhat faster pace of global growth in 2015, given the lagged benefit of low interest rates and the effect of low energy prices"
- "We would expect a monetary policy fully supportive of economic expansion in 2015 and 2016"
Despite sluggish economic growth in recent years, BNY Mellon's 2015 Outlook is for a prolonged global and U.S. economic expansion, according to BNY Mellon Chief Economist Richard Hoey. Stronger future growth should reflect a fading of drags on growth rather than new sources of strength says Hoey in his Economic Update entitled, "Outlook 2015."
"Following three years of global growth near 3% on the IMF measure, we expect a somewhat faster pace of global growth in 2015, given the lagged benefit of low interest rates and the effect of low energy prices," Hoey says. "Given the downward shift in trend growth in China, we expect the developing economies to expand at about the same pace in 2015 as in 2014."
"With the fiscal drag fading, the cyclical pace of U.S. economic expansion is now shifting higher," Hoey continues. "A somewhat similar pattern has emerged in the UK, although more fiscal tightening lies ahead. It is notable that the labor markets of these two countries are among the most flexible in the developed world, which appears to have fostered a combination of strong job growth and postponed wage inflation."
Hoey cites that due to the slow pace of global growth, there has been concern about deflation, disinflation and lowflation. (Deflation is a pattern of declining prices, disinflation is a downward shift in the pace of positive inflation and lowflation is positive inflation persisting at a pace only slightly above zero.)
"We make a distinction between 'bad deflation' due to a collapse in demand, 'capacity hangover deflation' due to past overexpansion of capacity and 'good deflation' attributable to successful technological innovation," Hoey says. "We believe that the oil and gas sector is an instance of 'good deflation,' as technological innovation has sharply reduced the cost of producing oil and gas in the U.S. The U.S. energy service companies are global leaders of technological innovation in the energy sector. We regard the recent weakness in energy prices as a symptom of successful technological innovation rather than as a signal of a weakening global economy."
Other report highlights include:
- Japanese Expansion Sustainable but Sluggish– Stating that Japan was "caught in a stagnant equilibrium for two decades," Hoey says that Japanese policy should stimulate a moderate cyclical expansion through low real interest rates.
- China Economy a Crucial Uncertainty for 2015 – Hoey states that the deceleration in Chinese economic growth is not cyclical but structural, due to the combination of a slowdown in the growth of its labor force and the need to correct past credit and property excesses. Hoey thinks that China is beginning a transition from a double-digit trend growth rate in the past to a sustainable growth rate near 6% in the future.
- Sustained European Expansion in 2015, 2016 and 2017 – While Hoey cites adverse demographics and relative energy prices, as well as a badly designed euro currency system contributing to a sluggish long-term outlook for Europe, Hoey is cyclically more positive about European prospects for the near term and expects moderate but sustained European expansion in 2015, 2016 and 2017.
- U.S. Economy "Three-for-Three" Growth Acceleration – Hoey believes that the U.S. economy has just made an upward shift from a half-decade of expansion at a real GDP growth rate slightly above 2% to three years of 3% real GDP growth. "This new "three-for-three" growth acceleration should be due largely to a fading of the persistent drag from the government sector over the last half-decade," Hoey says. Hoey also says that over the next three years, he expects U.S. real GDP growth to accelerate to about 3% and nominal GDP growth (real GDP growth plus inflation) to accelerate to about 5%. He also expects this acceleration of real and nominal economic growth to contribute to a multiyear uptrend in U.S. interest rates.
"We believe that U.S. monetary policy will be very supportive of economic expansion for the next several years," Hoey says. "With inflation below the Fed's target and some slack remaining in the labor market, both parts of the Fed's dual mandate support stimulative monetary policy." "Since we believe that the U.S. economy is not currently very inflation-prone, we would expect a monetary policy fully supportive of economic expansion in 2015 and 2016, with the need to shift to a truly restrictive policy postponed until 2017 or 2018, after the Presidential election of 2016," Hoey concluded.