Despite tempered expectations, most forecasters see strong growth ahead, accelerating in 2016. As our Global Economics Intelligence team reports, executives are focusing on divergent opportunities.
March 2015 | byLuis Enriquez, Ina Kota, and Sven Smit
Leading forecasters estimate that the world economy
will grow by between 2.8 and 3.8 percent this year—about one percentage
point lower than last year’s consensus forecasts. Yet as monitors of the
global economy lower their expectations for 2015, executives are
increasingly focusing on opportunities presented by diverging growth
rates among regions, countries, and even sectors. This means an
essential element of strategic and financial planning for 2015 and
beyond is taking closer account of critical regional trends and risks,
with sensitivity to key economic indicators and government policy
responses.
McKinsey’s Global Economics Intelligence (GEI) team closely tracks forecasts of leading financial institutions and multilaterals. By the latest estimate of the International Monetary Fund (IMF), in October 2014, world GDP growth was measured at 3.3 percent for 2014.1 For 2016, the IMF and other organizations have lowered previous global GDP growth projections to 3.1 to 4.1 percent (Exhibit 1). Most forecasters expect a robust US economy to continue to lead the way, and the eurozone’s new program of quantitative easing is a sign the region is ready for expansion. And while falling oil prices weigh heavily on growth prospects for commodities-dependent Brazil and Russia, China and India are benefiting from easing inflationary pressures.
Exhibit 1
Market volatility is being stoked in part by the steep decline in oil prices, which will adversely affect oil producers while benefiting consumers. Although the net impact of the lower prices will differ by country, a very rough estimate of the potential consumer savings is nearly $450 billion,2 which represents a considerable transfer of wealth from producing to consuming countries.3 In addition, while executives were confident about their own companies, “geopolitical instability” was cited as the leading risk to global growth in McKinsey’s global survey of nearly 1,700 business leaders at the end of 2014.4
Region by region
The first GEI reports of 2015 show the following regional pictures emerging (for a comparative snapshot, see Exhibit 2).
Exhibit 2
The US economy has momentum from stronger-than-expected growth at the end of 2014. Consumer sentiment and trade activity increased, the unemployment rate fell to 5.6 percent in January, and financial markets benefited from upbeat investor sentiment. However, retail sales dipped in December, and real wages continued to stagnate. The US economy has overcome a number of hurdles to see its way clear to a deeper and stronger recovery: the range of growth forecasts exceeds 3 percent for 2015.
In the eurozone, macroeconomic conditions are improving after sluggish growth last year. Even with a depreciating euro, deflation, and financial pressures hitting smaller economies, the underlying real economy appears to be gaining. A brighter picture is reflected in consumer sentiment, manufacturing, and trade—thanks especially to lower energy prices. If negotiations with Greece are effectively managed, the eurozone could be well positioned to benefit from Europe’s looser monetary policy, evident recovery in several of the region’s economies, and low or falling oil prices. Monetary uncertainty persists. The euro continues to depreciate against the dollar, falling sharply when the Swiss franc was unpegged on January 15. The European Central Bank has since announced that asset purchases would be expanded to €60 billion a month until September 2016. GDP growth forecasts for the eurozone in 2015 have been lowered slightly, with most estimates coming in above 1 percent.
China and India have both experienced broad improvements in macroeconomic conditions, especially as low energy prices eased inflationary pressures and import bills. Financial markets gained in China but remained volatile in India. Forecasts for both countries have been tempered slightly for 2015. For China, the economy is slowing in line with expectations, with most projections approaching 7 percent growth for 2015 and 6.3 percent in 2016. Conditions in India appear to be improving, and growth through 2016 is forecast at around 6.5 percent.
Brazil is struggling, but inflation has eased recently. The central bank remains cautious and has raised its overnight rate by 50 basis points. Trade and fiscal deficits posed new challenges for the newly elected government, as a possible debt downgrade looms. Most forecasts for Brazil’s GDP in 2015 were lowered, with a range of less than 1 percent.
Russia’s economic conditions worsened noticeably, as consumer confidence hit a five-year low and indicators for manufacturing and trade both fell. Inflation soared to 11.4 percent on an annual basis, as the ruble lost nearly half its value over the past 12 months. Most GDP forecasts for Russia in 2015 have been cut sharply, ranging from zero growth to a contraction of 0.7 percent.
Even the lowered global-growth estimates of more than 3 percent in 2015 and 2016 remain well above the historical average of 1.8 percent annual growth during the past 50 years.5 But executives remain wary of macroeconomic and geopolitical risks, including oil and gas price volatility and its impact both on major exporting economies, Russia foremost, and on consuming economies, including Europe, Japan, and the United States. Other significant risks are the conflict between Russia and Ukraine, with its European and global ramifications; China’s downshifting economic pace, which has implications for global trade; the effects on foreign exchange levels and capital availability of diverging monetary-policy actions by central banks around the world; and Greece’s unresolved status in the eurozone, which raises significant questions about the economic future of Europe and the global economy.
McKinsey’s Global Economics Intelligence (GEI) team closely tracks forecasts of leading financial institutions and multilaterals. By the latest estimate of the International Monetary Fund (IMF), in October 2014, world GDP growth was measured at 3.3 percent for 2014.1 For 2016, the IMF and other organizations have lowered previous global GDP growth projections to 3.1 to 4.1 percent (Exhibit 1). Most forecasters expect a robust US economy to continue to lead the way, and the eurozone’s new program of quantitative easing is a sign the region is ready for expansion. And while falling oil prices weigh heavily on growth prospects for commodities-dependent Brazil and Russia, China and India are benefiting from easing inflationary pressures.
Exhibit 1
Global GDP forecasts anticipate gradual strengthening in 2015 and 2016.
Market volatility is being stoked in part by the steep decline in oil prices, which will adversely affect oil producers while benefiting consumers. Although the net impact of the lower prices will differ by country, a very rough estimate of the potential consumer savings is nearly $450 billion,2 which represents a considerable transfer of wealth from producing to consuming countries.3 In addition, while executives were confident about their own companies, “geopolitical instability” was cited as the leading risk to global growth in McKinsey’s global survey of nearly 1,700 business leaders at the end of 2014.4
Region by region
The first GEI reports of 2015 show the following regional pictures emerging (for a comparative snapshot, see Exhibit 2).
Exhibit 2
Indicators show steadiest improvement in developed economies.
The US economy has momentum from stronger-than-expected growth at the end of 2014. Consumer sentiment and trade activity increased, the unemployment rate fell to 5.6 percent in January, and financial markets benefited from upbeat investor sentiment. However, retail sales dipped in December, and real wages continued to stagnate. The US economy has overcome a number of hurdles to see its way clear to a deeper and stronger recovery: the range of growth forecasts exceeds 3 percent for 2015.
In the eurozone, macroeconomic conditions are improving after sluggish growth last year. Even with a depreciating euro, deflation, and financial pressures hitting smaller economies, the underlying real economy appears to be gaining. A brighter picture is reflected in consumer sentiment, manufacturing, and trade—thanks especially to lower energy prices. If negotiations with Greece are effectively managed, the eurozone could be well positioned to benefit from Europe’s looser monetary policy, evident recovery in several of the region’s economies, and low or falling oil prices. Monetary uncertainty persists. The euro continues to depreciate against the dollar, falling sharply when the Swiss franc was unpegged on January 15. The European Central Bank has since announced that asset purchases would be expanded to €60 billion a month until September 2016. GDP growth forecasts for the eurozone in 2015 have been lowered slightly, with most estimates coming in above 1 percent.
China and India have both experienced broad improvements in macroeconomic conditions, especially as low energy prices eased inflationary pressures and import bills. Financial markets gained in China but remained volatile in India. Forecasts for both countries have been tempered slightly for 2015. For China, the economy is slowing in line with expectations, with most projections approaching 7 percent growth for 2015 and 6.3 percent in 2016. Conditions in India appear to be improving, and growth through 2016 is forecast at around 6.5 percent.
Brazil is struggling, but inflation has eased recently. The central bank remains cautious and has raised its overnight rate by 50 basis points. Trade and fiscal deficits posed new challenges for the newly elected government, as a possible debt downgrade looms. Most forecasts for Brazil’s GDP in 2015 were lowered, with a range of less than 1 percent.
Russia’s economic conditions worsened noticeably, as consumer confidence hit a five-year low and indicators for manufacturing and trade both fell. Inflation soared to 11.4 percent on an annual basis, as the ruble lost nearly half its value over the past 12 months. Most GDP forecasts for Russia in 2015 have been cut sharply, ranging from zero growth to a contraction of 0.7 percent.
Even the lowered global-growth estimates of more than 3 percent in 2015 and 2016 remain well above the historical average of 1.8 percent annual growth during the past 50 years.5 But executives remain wary of macroeconomic and geopolitical risks, including oil and gas price volatility and its impact both on major exporting economies, Russia foremost, and on consuming economies, including Europe, Japan, and the United States. Other significant risks are the conflict between Russia and Ukraine, with its European and global ramifications; China’s downshifting economic pace, which has implications for global trade; the effects on foreign exchange levels and capital availability of diverging monetary-policy actions by central banks around the world; and Greece’s unresolved status in the eurozone, which raises significant questions about the economic future of Europe and the global economy.
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