But diverging policy responses could reverse the rankings when it comes to the markets, as further easing from the ECB and the Bank of Japan provides at least some support to local equities and keeps bond yields low.
While some smaller emerging economies are vulnerable to Fed tightening, the outlook for the BRICs will largely depend on progress on domestic reform and restructuring – or the lack of it.
Last but not least, the world as a whole will benefit from an extended period of lower oil prices. But this will widen the policy divergences between the US and Europe, and cause serious problems for some oil exporters, most obviously Russia.
1. Fed to raise US interest rates sooner and further than generally anticipated
While Fed officials have signalled that they are in no hurry to begin tightening policy, they have also stressed that the timing will depend on the data. In our view, labour market conditions are now improving at a rapid pace and wage pressures are building.
We therefore believe that both the Fed and the markets are under-estimating how rapidly rates will need to rise over the next few years. This should not only provide additional support for the dollar, but also drive Treasury yields higher and, alongside a squeeze on profit margins, help to limit any gains in US equities (despite lower headline inflation and buoyant growth).
2. ECB to launch full-blown QE
The European Central Bank will almost certainly announce a programme of outright purchases of government bonds early in the New Year. However, while this should lift asset prices, the already low levels of yields and continued risk aversion in the banking sector will limit its effectiveness in supporting economic activity.
The new norm for the eurozone could look like Japan, with growth of 1 per cent or less and a significant risk of a damaging deflationary spiral, implying a further depreciation of the euro and a long period of rock-bottom German bond yields. The renewed uncertainty in Greece is also a timely reminder that the economic and financial crisis in the periphery is not over yet.
3. UK recovery to hold up
The UK recovery will maintain its pace in 2015, thanks to the fastest growth in real incomes in 12 years and further strength in investment. What’s more, lower energy costs and a revival in productivity will help keep inflation below target, enabling the Bank of England to raise interest rates only gradually. This should facilitate some partial decoupling of UK gilts from US treasuries.
However, market sentiment and the pound in particular will be vulnerable to heightened political uncertainty surrounding the general election (in May) and the prospect of a referendum on EU membership.
4. Yen’s slide to continue
The yen will slide to at least 140 against the dollar, especially with the Bank of Japan and the Fed likely to be at opposite extremes of policy-setting among major central banks. In any event, it is hard to see any solution to Japan’s economic and fiscal problems that does not involve a significantly weaker currency.
5. China to slow a little further, but avoid a ‘hard landing’
GDP growth will continue to slow, rather than rebound (as some expect). In particular, the property sector has not yet bottomed out. Nonetheless, policymakers still have plenty of tools to prevent a crash, and reforms are proceeding well.
6. India reform progress to disappoint
Weak reform momentum, rather than the current account deficit, is now the major threat to India’s growth, which is likely to undershoot most expectations in both the near and medium term. But with the right reforms, the longer-term prospects would be much brighter. And in the meantime, monetary policy is set to be loosened further than most anticipate.
7. Russian GDP to shrink by as much as 5 per cent in 2015
Consensus forecasts for Russian growth are still too optimistic and inflation is likely to rise much further than most expect too. Indeed, the economy is likely to struggle even if oil prices stabilise and the conflict in Ukraine eases, allowing sanctions to be lifted. Structural constraints mean that without a new wave of reform, growth is likely to be stuck below 2 per cent over the longer term as well.
8. Oil prices to remain lower, but industrial and precious metals prices to recover
Brent has found support at around $60 per barrel, as we had anticipated, but ample supply will prevent a strong rebound. Nonetheless, the boost to global activity should lift metals prices in 2015, so many commodity exporters could still be better off, as well as emerging economies who are large net energy importers.
Julian Jessop is chief global economist at Capital Economics. The views expressed here are his own.