Helaba Economic and Capital Market Outlook 2015: “Bonsai: Growth in Miniature”

Bonsai: Growth in Miniature

  • Momentum in global economy to pick up slightly in 2015
  • Regulation and structural weaknesses will restrict potential for self-sustaining momentum
  • World economy caught in a “bowl”: Only bonsaiesque growth
  • DAX range 2015 still between 8,300 and 10,000 points

Frankfurt, Germany, 1-12-2014 — /EuropaWire/ — The coming year will see growth in the global economy gaining somewhat in momentum. “But even in the seventh year after the outbreak of the financial crisis, there is no talk of a broad global upswing”, says Dr. Gertrud R. Traud, Helaba’s Chief Economist, at the presentation of the study “Bonsai: Growth in Miniature”. “After the excesses that led to the financial and sovereign debt crisis, huge efforts were undertaken to influence the forces driving growth. In future, the aim is to prevent the worst practices that brought banks and countries to the edge of collapse. Economies were “planted into bowls”, so to speak, pruned and shaped by various regulations, just like small bonsai trees. Accordingly, growth rates are stuck at a low level.

The USA stands alone among large industrial countries in having managed to lift its industrial production above the pre-crisis level of 2008. Helaba’s economists expect relatively strong momentum there for 2015 and a rise in real US GDP of 3 per cent. On the other hand, developments in Euroland will be much more subdued. Here, economic growth continues to be held back by France and Italy, with the effect that the euro area will only grow by around 1 per cent. Germany should be able to realise slightly above-average growth of 1.3 per cent, despite the current pension and labour market measures, which will have a negative impact on competitiveness, as well as the introduction of the minimum wage in 2015,” as Dr. Traud explains. In the emerging market countries, the catch-up phase that had generated above-average momentum in capital investment activity in the past will probably come to an end. This is particularly true for China and Brazil.

The sharp fall in oil prices at the end of 2014 will initially put a significant dampener on inflation rates. On a global level, it will become clear – just as in previous years – that deflation and inflation fears are both similarly misplaced. The worldwide rise in consumer prices will remain at around 3 per cent. Consumer prices in the USA should only increase by 1.2 per cent in the coming year, in the eurozone even by as little as 0.8 per cent. The German inflation rate, due to wage settlements in the region of around 3 per cent and the introduction of the minimum wage, is likely to come in slightly higher at 1.1 per cent.

The historically high bond prices in the euro area will continue to be strongly supported by the ECB, especially in the case of short and medium-term maturities. With expanded purchasing of corporate bonds and government papers, Mario Draghi will push ahead with his policy of monetary easing and will switch from an interest rate-driven policy to steering the ECB’s balance sheet. In this environment, it would seem expedient to reverse the negative deposit rate. In the USA, the yield on 10-year treasuries can be expected to increase to 3 per cent by the end of 2015. After a further temporary fall, yields on German Bunds will rise to 1.1 per cent by the end of the year. In the European periphery, the ECB’s purchase programme should further reduce risk premiums. The interest rate on 10-year government bonds will be in a range of between 0.5 per cent and 1.3 per cent in Germany, in the USA of between 2.2 per cent and 3.3 per cent.

The divergent monetary policies on both sides of the Atlantic will continue to drive the euro-dollar rate. The Fed’s interest rate turnaround in the first half of 2015 should give a boost to the US dollar, while the ECB’s expansionary measures should conversely put pressure on the euro. Experience shows that the US currency realises the biggest gains in the run-up to a turnaround in interest rates. Once it has happened, it is not unusual to see opposite movements in exchange rates. The current position against the US dollar, which is already pronounced, will in any case restrict any potential for appreciation. Furthermore, since economic activity in the eurozone, which is still weak, will consolidate in the course of 2015 and thus relieve the pressure on the ECB, the euro-dollar rate should recover again by the end of 2015. (euro-dollar range 2015: 1.10 to 1.30).

With their highs and lows of 2014, equities have probably defined their price range for 2015, too. Doubts over economic growth are likely to keep up the pressure on prices into the spring before a gradual economic recovery will enable share prices to rise once again. However, the generally high valuation level will limit any upward potential to the extent of the growth in corporate profits. In view of the subdued momentum in the global economy, only moderate profit gains can be expected overall. In the case of EURO STOXX 50 and DAX listed companies, margins have somewhat more upside potential than US companies, with the result that net earnings should rise at a slightly sharper rate than revenues. Moreover, since the US has scaled back its expansionary monetary policy, while the ECB is going to ramp theirs up, euro equities should perform better than their US counterparts. (DAX range 2015: 8,300 to 10,000 points)

Asset Allocation
In view of fundamental prospects, no really attractive balance of opportunities and risks is discernable for any classic investment class for 2015 as a whole. In multi-asset mixed portfolios, it would be advisable to raise the equities quota to neutral in the course of the year. In return, bonds should be underweighted in favour of real estate in the coming year. Since the prices of commodities and gold will probably stabilise, in the best-case scenario, they hardly represent a serious alternative, even in terms of an add-on to the portfolio. Overall, a particularly close alignment to a long-term focussed strategic allocation is recommended.

The complete study is available in German at http://volkswirtschaft.helaba.de


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