JLA -THE ECONOMY - What's Around the Corner in 2015?

THE ECONOMYWHAT’S AROUND THE CORNER IN 2015?

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JANUARY 2015

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THE ECONOMY: WHAT’S AROUND THE CORNER IN 2015?

FEATURED SPEAKERSROGER BOOTLETODD BUCHHOLzFRANCES CAIRNCROSSANTHONY HILTONDAME DEANNE JULIUSLORD LAMONTDOUG MCWILLIAMSBRONWEN MADDOxVICKY PRYCEDAVID SMITHJUSTIN URQUHART STEWARTMARTIN VANDER WEYERPROFESSOR MARVIN zONIS

JANUARY 2015

Would the City take another coalition or minority government in its stride? Financial markets are more sanguine about political developments than most people imagine. This is probably because, despite the bluster, the differences between parties don’t amount to much. This election could be an exception. Labour’s macro plans shouldn’t worry the market; they’re quite capable of being tough on borrowing – at least for the first few years. The micro problems are more of a concern. Higher taxes and the likelihood of direct intervention in businesses are not good news.

How do you expect the currency and stock markets to perform? At some point the pound is heading for a major fall of 20-30%, but the timing is uncertain. The yen may need to be driven much lower to generate sufficient inflation. UK equities are fairly valued and look like a good investment over the medium term, but the US market looks expensive. I suspect they’re going nowhere fast.

Do you see the Eurozone making any progress – with or without QE? I’m pessimistic about the Eurozone. It’s on course for stagnation and therefore intensification of the debt crisis. There are two ways out. 1) Germany relents, eases policy and allows others to go slow in fiscal consolidation; it allows Draghi to pursue massive QE and bring the Euro lower on the exchanges. If that happens they can stagger on. 2) One country leaves, pressure increases on the others and before long there’s a partial break-up. My money is on the latter.

Can we accurately calculate the effect of Britain voting to leave the EU? There’s no settled or authoritative account of the costs and benefits of ‘Brexit,’ not least because the issue is swathed in uncertainty. But we do know that the wilder claims on both sides of the debate are hogwash. At the risk of inviting ridicule, I will say that the best account of the pros and cons is to be found in my recent book, The Trouble with Europe!!!


Specialist Advisor, House of Commons Treasury Committee


RogeR Bootle

JANUARY 2015

What should we expect of the US in 2015? The US economy is pulling away from the rest of the world, and the European slump is helping. How? By stomping down on interest rates, which makes it cheaper for Americans to buy homes and autos. The sluggish global economy also keeps down oil prices, which allows our consumers to spend less money at the pumps and more at electronics and clothes stores.

Human beings can learn from mistakes. In the 30s the Depression catapulted the jobless rate to 25%, while the Federal Reserve tightened credit. During the scary 2009 recession, a wiser Fed kept the jobless rate from topping 10%.

Politically the Republicans have no reason to cosy up to Obama. He’s a lame duck and his quack will get more faint – yet the most fascinating battle may come within the Democrats. Left-wing former Obama supporters will tar Hillary Clinton and Joe Biden as sell-outs to the Washington establishment and big business. Activists are pushing Massachusetts Senator Elizabeth Warren, a firebrand who can raise big money. Meanwhile the question for Republican voters in the Primaries is: “Is he truly conservative, or is he just pretending?”

How do you see the Chinese economy shaping up? Chinese leaders are jittery about growth. No surprise that the central bank slashed interest rates – look for more cuts in 2015. With Europe slipping into deflation and oil prices plunging, Chinese leaders are more worried about a Great Recession than Great Inflation.

Their equity market has soared to a 3-year high, thanks to a decision to allow foreign investors to buy Shanghai shares directly – but I’m not convinced the rally in stocks will drive the yuan higher. First, Obama doesn’t seem to care about the exchange rate anymore. Second, with Europe and Japan weak, China can’t afford to give up its undervalued currency. Third, US interest rates will go up, attracting capital from abroad. Fourth, if a 30% rally in Shanghai couldn’t drag their currency up, it’s not ripe to soar in early 2015.

Incidentally, if Beijing leaders want to juice auto sales above their current 3%, they could make it easier for buyers to finance their purchases. 80% show up with cash (15% in the US), so there’s an easy solution: lobby President Xi to make Chinese dealers more like their US counterparts: more financing and more mark-ups for dealer-installed options, undercoating and floor mats!


Former White House Director for Economic Policy


Todd Buchholz

JANUARY 2015

What will determine the strength and pace of UK growth in 2015? To a degree our growth is linked to the EU. It’s such a huge export market that its stagnation is a considerable threat; but there’s also the prospect of much more difficult public spending cuts. We are barely halfway through these cuts, in spite of what Cameron says, and the next batch will be much more painful.

To what extent are we reliant on the EU, US and Chinese economies? Ultimately we are very dependent. We’re a very open economy. The EU mess is especially worrying. My money is on 2017 as the breakdown year - at least breaking into a strong euro and a weak euro. US recovery seems reasonably sound - partly because it is easier for debtors (including the city of Detroit) to free themselves from debt and start again. China will continue to grow, and to build capacity in areas that compete directly with us - like universities. I don’t foresee a China meltdown, unless they misjudge Japan.

Is wage compression a serious problem – what’s the solution? Wage compression is partly the consequence of the tremendous wave of immigration, which particularly hits low-wage workers. I’m not sure there’s an easy answer, especially as the top-up benefit to the working poor is one of the things most likely to be savaged in the spending cuts. But it’s also harder than it was to see who’s earning what: the big rise in the self-employed may hide higher earnings than get reported to the taxman.

Can we calculate the costs/benefits of EU membership? No, partly because we will probably be ‘just in’ the EU or ‘just out.’ We are just in at present. The decision not to join the euro, predicted to have dire results, had the opposite effect. And given how much we import from Germany, they have no interest in making life difficult for us.

Is there anything that gives you particular cause for optimism? Yes, more older people are continuing to work well into their 70s. It’s set to be a revolution as transformative as the arrival of women workers in the 1960s – and employers will alter work patterns to accommodate them.


Chair, Executive Committee, Institute for Fiscal Studies


Frances cairncross

JANUARY 2015

How would you sum up the UK outlook in 2015? For the first time in a generation, the political risk is more obvious than the economic. The two main parties have dwindling support and a Parliamentary majority for either looks unlikely. The next Government will most likely be a coalition or a less formal alliance either on the right or the left.

Neither will be good for the economy because both will demoralise business. The Conservative plan to hold a referendum on EU membership will cause investment to drain away while the world waits; the Labour prescription of more state intervention is a throw back to the failed policies of the 1970s. Neither addresses the real issue of how the UK stays in the game.

On the plus side the oil price fall is a massive boost, giving real spending power to those whose incomes have been squeezed for a decade. Young people, particularly in creative and technology sectors, are showing real entrepreneurial spirit. London is a magnet for the world’s most talented people. Vigorous (though overdue) efforts are being made to rejuvenate provincial cities. And there is the short-term boost to come from giving people instant access to their pension pots, which could unleash £6bn of additional spending. All the ingredients are in place for a long period of growth – so long as the politicians don’t muck it up.

What about the danger of deflation? As oil prices have fallen, deflation has moved centre stage. Avoiding it is becoming the major preoccupation of policymakers, but the reasons why it should be so feared are sketchy to say the least. If inflation is bad, how can deflation be such a scourge?

Theoretically deflation holds back demand – which stifles investment, employment and income growth. But that’s a typical economist’s argument. It assumes people are totally rational. In fact people behave emotionally. We buy goods (if we can afford to) when the idea occurs to us.

There’s also a view that deflation will cause 20 years of stagnation as it did in Japan. It’s true that Japan has shown little growth, but that’s because growth measures total output, not output per head. In fact the working population has shrunk significantly, unemployment is low and productivity is impressive. Japan’s problems stem from Government policies to correct a growth deficit that didn’t exist, thereby running up huge debts and destroying the state finances. This could also happen in the West. The risk is not deflation, but misguided efforts to prevent it.


Senior Commentator, The Independent & Standard


Anthony hilton

JANUARY 2015

What’s the solution to wage compression and rising inequality? The combined forces of technology (now affecting semi-professional jobs) and globalisation are eroding middle-income opportunities. At the same time they hold down the wages of the low-skilled and boost earnings for those with high skills in demand in global markets – like finance and executive management. The problem is that income inequality drives politicians to protective policies that often lower growth and stifle innovation. The solution must be to raise the skills of our labour force and target learning to fields in which there’s rising employment demand. Universities have a role to play, as does government in its visa policies and its support for research.

And what’s your prognosis for the Eurozone?The fundamental problem of monetary union without central political control over fiscal policies remains, and threatens the euro’s sustainability. Markets are too complacent in believing the ECB’s promise/threat to do ‘whatever it takes’ to save the euro. I doubt Mrs Merkel has the political support to allow the ECB to engage in real QE by buying the government debt of EZ countries or injecting TARP-like capital into Europe’s banks. Without that the zone will remain trapped in slow or no growth equilibrium. If low demand and falling oil prices produce lasting deflation (or even so-called ‘lowflation’ above zero but below 1%) then the unsustainability of government debt for Italy, Spain and possibly even France can trigger a full-blown financial crisis in short order.

In a nutshell, how do you see the global economic outlook? I am currently bullish on the US and UK, cautious on China and bearish on the Eurozone, Russia, Brazil and the Middle East.


Former Member, Bank of England Monetary Policy Committee


Dame Deanne Julius

JANUARY 2015

What would be the impact of a minority Labour Government?Naturally I favour majority Conservative government, but there is a possibility that no party will have an overall majority after May’s election. A minority Labour government with SNP support would have important consequences beyond economic policy, in which they’re quite closely aligned. Most disturbing would be the concessions Labour might make. The fiscal devolution already promised by David Cameron and the other political parties goes a very long way; there’s not much left to give. It might well lead foreign investors to reconsider Britain’s attractiveness as a safe destination.

How disturbing is Eurozone deflation - could it spread to the UK?Deflation is not necessarily bad. For long periods in history Britain had increasing living standards and stable or falling prices (- and some countries in the Eurozone have begun to recover with negative inflation). Of course a cycle of deflation that leads to consumers deferring purchases would be a problem, but that isn’t what we’re experiencing at the moment.

The main effect of negative inflation will be to boost consumer spending in Italy, Germany, Spain, France, the UK and Ireland – adding around 0.25% to GDP. Of course falling prices pose a danger for highly indebted countries, which becomes more of a problem if it lasts for a long time. I remain sceptical whether QE, which the markets expect from the ECB, will perform any great miracle for the Eurozone.

Given your long-standing interest, what do you make of relations with Iran?It’s quite possible that no agreement will be reached between Iran and the P5+1 by July. There’s still a considerable problem about the scale of any permitted Uranium enrichment programme. However, I do not believe President Rouhani wants to return to the status quo ante. He’s shown a lot of courage, recently threatening hardliners with a referendum on the nuclear negotiations; and although both Iran and the West may deny it, there is now a common interest in the fight against the Islamic State.

In the long run, I strongly believe Iran has the capacity to change. It has elements of democracy in its politics, it has a strong civic society and in the urban population a large Western-oriented middle class. The Revolutionaries are growing old. Iran will eventually open up and be full of exciting opportunities for cooperation with the West.


Former Chancellor of the Exchequer


Lord Lamont

JANUARY 2015

How do you see the year shaping up?2015 starts with negative momentum in Europe, China, Japan and the Middle East. But cheap food, cheap petrol and falling energy bills should revitalise the world consumer, and by year end the world economy could be close to booming.

The UK should continue to do well: growth might even surprise on the upside. London will grow faster than the rest of the UK and comparable cities around the world, with digital leading the charge. (You can read about it in my book coming out in March, The Flat White Economy.) House building in the capital will be faster than at any time since post war reconstruction. This should help keep house prices down.

Do you expect the election to have much bearing on the economy?The General Election has every prospect of ending up a real mess. If Alex Salmond puts Ed Miliband in Downing Street when by most measures he’s lost the election, the effect in England could be dangerously unstable. There would be a move to end the Barnett Formula that subsidises Scotland, and maybe even pressure (in England) to expel them from the union!

The election, a ‘backdoor mansion tax‘ in Stamp Duty, the prospect of further tax rises and the possibility of EU withdrawal will leave the pound weak in the run-up – and after the election if there’s a left-wing government.

Given it’s one of CEBRs specialities, what will be the big energy stories?The fall in oil prices has overshot. Prices should bounce back, though the rebound will be limited thanks to substantial over-supply (unless the Saudis are forced to cut output). Natural gas prices will fall; in Europe they’re indexed to oil and must come down in 2015. Russia will not cut gas supplies.

Nuclear power will return in Japan - with one or two stations. That will also set a ceiling on gas prices. High cost LNG projects in Australia will be postponed indefinitely, and there’ll be no shale gas revolution in the UK. Few wells will be drilled as the companies involved face a cash shortage. North Sea activity will decline - as will tax revenue. A budget tax cut will do little for development; decommissioning will be the new business in Scotland.


Executive Chairman, Centre for Economics & Business Research


Doug McWilliaMs

JANUARY 2015

Would the Eurozone take a Greek exit in its stride?My guess is yes, it would survive without catastrophe. There is a strong case that Greece needs debt write-offs and this may be the easiest way to get that. I’m not sure Merkel has a perfect sense of the exposure of European banks to Greek debts of all kinds. To that extent, her tough stance is partly bluff; both she and Syriza would probably go a long way for a fudge.

How will the low price of oil affect the fracking industry?It will make little difference for the US – they’ll keep on fracking. American oil and gas produced this way is still cheap, even compared to the current state of world markets. And it’s impossible to overstate the sense of exhilaration in Washington from the independence that fracking has given, quite apart from the boost to the national economy.

In the UK on the other hand, fracking is struggling to get going, from planning reservations as much as anything. It will become a small part of the energy mix - and stay that way. Our roundtables with the energy and construction industry, and with Ed Davey and Caroline Flint, confirm that view.

What do you expect of Putin in 2015? He won’t be so aggressive. He’ll probe alliances that can strengthen his hand. After the astonishing success of the Crimea annexation (as he sees it), he will look at securing a land bridge, obtaining tacit German and French support when EU sanctions expire in the Summer, increased trade with India, Chinese investment, and the appetite for Russian passports in the Baltics. But none of these would give him a strong new card. And if Iran and the US come to terms on a nuclear deal, a sudden rush to bring Iran in from the cold could cost him a very important ally.


Editor and Chief Executive, Prospect


Bronwen Maddox

JANUARY 2015

Are lower oil prices a net benefit to the UK economy? Yes – although the government tax take will suffer in the short term and the current account deficit will get larger as the value of oil exports reduces, the consumer will benefit and spend more on other things. Businesses that have been complaining about excessive energy costs will also find life easier and be more prepared to expand and invest.

Some oil producing countries will lose, but lower oil and gas prices are good for the world economy and the UK will benefit. That should compensate for cuts in North Sea oil jobs by producers whose fields become uneconomical.

Would the EZ take a Greek exit in its stride, if Syriza decide to leave? Syriza has no intention of leaving – or at least it thinks it can renegotiate but stay in, because Europe will want to keep Greece in the fold. They might be right: if Greece were to leave, the entire Euro project could be in peril.

Do you see Eurozone deflation continuing – and spreading to the UK? There was deflation in places like Greece before the oil price decline. Now the Eurozone average consumer price index is falling (though prices are still rising in some countries). If it turns out this is all about oil, there’s nothing wrong with that; it should prove stimulatory. But part of it is due to the very slow growth of the Eurozone and that’s what’s worrying the markets.

The UK is growing much faster. Of course inflation is very low here to – and it will be affected by lower oil prices as well as intense supermarket competition. But deflation can probably be avoided in Britain as the authorities have more levers than the individual Eurozone countries, which have to depend on Mario Draghi to rescue them.

What would be the effect of a minority Labour Government with SNP support?Chaos!!! And another election soon afterwards.


Former Economic Director General, Department for Business, Innovation & Skills


Vicky Pryce

JANUARY 2015

What will determine the pace of growth in 2015?Two things: the extent to which wages recover, boosting real income growth, and the performance of the Eurozone. The UK economy has been in a sweet spot over the past 12-18 months. I expect growth to slow a little (2.5% rather than 3%), but to remain relatively good.

And what will prompt the BoE to raise interest rates?The Bank wants to start ‘normalising’ policy by raising rates but it’s cautious about what would be the first hike since 2007. Stronger wages will make it feel more confident as will a clear signal that the Federal Reserve is moving in the same direction. But the timing has probably moved to the second half of 2015.

Do you see Eurozone deflation spreading to the UK?The UK will come close to deflation in coming months. Inflation will be close to zero and could easily briefly go below it. But I think it’s important to distinguish between ‘good’ deflation arising from a positive global price shock like falling energy and commodity prices – and ‘bad’ deflation caused by weak demand. The Eurozone has elements of both, but for Britain it will be ‘good disinflation.’

What effect will the drop in oil prices have on fracking in the UK?Lower oil prices will not stop work to locate and identify the scale of UK shale oil and gas reserves. But low prices and the global supply-demand imbalance will push out the timetable for exploitation. Given that exploration in the North Sea has dropped to its lowest level for years, fracking (which is inherently more speculative) will not be an urgent priority. Incidentally, the plunge in oil prices knocks the already weak economic case for Scottish independence.

With a referendum looming, can we calculate the cost/benefit of ‘Brexit’?No, it’s a hugely complex question, relying on many assumptions. That said, my view is that the costs of exit would outweigh the relatively minor benefits. Other EU countries would be reluctant to give Britain too easy access to the single market, so the potential loss of inward investment would be significant. I don’t, by the way, think we will leave. The Scottish referendum taught us that in the end voters are cautious about big constitutional changes, particularly if business is warning against them.


Economics Editor, The Sunday Times


DaviD Smith

JANUARY 2015

How do you see the UK economy shaping up in 2015? I see fog banks ahead. With the election dominating confidence this is going to be a disruptive period, as British and foreign investors worry about what the UK leadership is going to look like this time next year.

The agony and the ecstasy will continue. Expenses will increase, revenue will grow but not by enough, and the deficit will rise; against that we’ll see record employment and business start-ups and good growth. Things could improve as pay levels increase – whoever wins the election will likely get the benefit.

What’s the big challenge for the next government?The question is, will they better understand how to use government spending for longer-term infrastructure investment in valuable developments? I don’t mean 50-year old HS2 technologies, but dynamic Maglev breakthroughs that the Japanese are using as the next stage of the old bullet trains.

What about interest rates?George Clooney (sorry, Carney) won’t raise interest rates anytime soon. He’ll wait until there is any sign of inflation ahead. He will recall that the US raised interest rates in 1936 after the Depression – which resulted in the economy going straight back into recession.

Are you optimistic over the long term?Yes. What a change we’ve seen with over half a million start-ups each year. Now add to this new regional investment hubs (reinventing the old 45 regional stock exchanges), tie it together with regional devolution and we could enter a New Victorian Age – with a much broader base of wealth creation.


Market Commentator


Justin urquhart stewart

JANUARY 2015

What will determine the strength of growth this year?A return to real wage growth, continuing low interest rates, continuing falls in unemployment and rising numbers of new businesses.

Do you expect a good year for the City?Not particularly. Financial markets are much less optimistic than consumers. The investment banking community is still contracting, at each other’s throats in terms of competition for deals, and still hated by the rest of the nation.

Will anything be done about wage compression?All mainstream parties probably favour a higher minimum wage — but the truth is that the labour flexibility of the UK economy and people’s willingness to work for low wages, ‘zero hours’ or part-time, has been key to recovery and renewed growth.

Would we see significant changes if Labour were to win in May?Less than some might fear. We’d see a repeat of Gordon Brown’s first couple of years, shadowing Tory spending plans to try to win market confidence. But Ed Balls will struggle to do that, and I think markets would react badly.

Can the Eurozone recover without fundamental reforms?NO.

Is it possible to calculate the effects of ‘Brexit’ with any accuracy?No, but the large corporate sector is clearly against it. Foreign multinationals are quite likely to relocate to within the EU if we’re outside it. All we can say for certain is that a referendum vote to exit would lead to a period of economic turmoil before the real results became clear.


Editor, Spectator Money


Martin Vander Weyer

JANUARY 2015

How do see the year panning out for China?China’s slowdown will come with increasing expressions of ambitious and occasionally aggressive nationalism. Those who’ve succeeded then seek to emigrate. More than 80% of the EB-5 visas the US grants to non-US citizens who invest $1m in return for a green card are awarded to Chinese people.

And for Russia?Despite the sanctions and economic woes, Putin’s thuggish behaviour will continue, both in Ukraine and in resurrecting certain Cold War practices like flying Russian bombers over the Gulf of Mexico. Provoked by efforts to make a Ukraine a ‘Western’ state, he’s unlikely to halt his revisionist plans.

What about the Middle East?We will continue to see the implications of the radicalisation of Sunni Muslims as exemplified by Islamic State, and the threat to Gulf Arabs. Meanwhile the Iran nuclear deal will radicalise Shiite behaviour across the Arab world.

How would you characterise the global business challenge in 2015?The efforts of China, and to a lesser extent Russia, to revise the post-World War international order suggests a weakening of existing global institutions, more bilateral trade deals, and more competition as Chinese firms take on European and US companies everywhere — including Africa.

What clouds do you see – and what gives you cause for optimism?The clouds are many, from climate change to terrorists striking targets in the West and political paralysis in the United States – along with growing income inequality and stagnant wages. Better news is the prospect of technological innovations solving many of our problems: renewable energy, auto engine efficiency, heightened agricultural yields, affordable water desalination and cures to numerous illnesses.


University of Chicago


Professor Marvin Zonis

JANUARY 2015

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JANUARY 2015

JLA -THE ECONOMY - What's Around the Corner in 2015?

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