Economic Commentaries

Entries for December 2014



The consensus economic forecast for 2015 is one of solid but unspectacular economic growth. Broadly sketched, the consensus is for about 3.5% global GDP growth with China advancing by about 7% and Europe and Japan growing by about 1% respectively. U.S. real GDP growth is being pegged at slightly more than 3% with inflation at about 1.7%. The benchmark ten year Treasury rate is forecast to rise to over 3% in the coming year.

Our base case forecast is for less robust activity, lower inflation, and lower interest rates. We think U.S. nominal GDP growth will be less than 4% with real growth at about 2.4% and inflation at 1.3%. We would expect slightly faster growth in the year’s first half versus the second half assuming no significant externalities. We think the benchmark ten year treasury rate will be around 2.25% with a range of about 1.8% to 2.6% -- a full percentage point below the consensus. We do not expect the Federal Reserve to hike interest rates in 2015 and we expect the interest rate yield curve to continue flattening especially if the Fed were to hike rates as is the consensus forecast. Finally, we think the global economy will continue to struggle with global growth slightly below 3%.

This base case forecast has some noteworthy underlying assumptions. For starters we expect continued commodity price weakness while labor cost pressures remain nil and the dollar exchange rate remains strong although hopefully not too strong. We expect the Treasury budget deficit to continue falling and we expect quantitative easing from abroad. Thus, there will remain a relative shortage of sovereign debt instruments. Finally we are assuming that $75 is the new $100 for oil and that the full impact of reductions in industry capital spending will occur in the year’s second half.

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