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Looking ahead: The global economy in 2015

The global economy expanded by some 2.7 percent in 2014. erten_125Here, Bilge Erten, an assistant professor of economics and international affairs at Northeastern University, explains what we can expect in 2015.

Bloomberg Businessweek recently posited that the “2015 global economic outlook will be better than 2014, but not by much.” What’s your forecast for the 2015 economy?

Most economists agree with Bloomberg. The Economist predicts that the global economy will grow by 2.9 percent in 2015, which is slightly better than its estimate of 2.5 percent in 2014. The U.S. economy is expected to be the best performing advanced country with a growth rate of 3.3 percent in 2015, while the European countries are expected to be among the worst performers with an overall growth rate of 1.4 percent. The European Central Bank has not expanded its balance sheet as much as the Fed and the Japanese Central Bank—in fact, it has contracted in the recent months—and this weak monetary stimulus, together with the sluggish aggregate demand following the crisis, has created a deflationary pressure. The ECB announced that it intends to start quantitative easing in 2015 despite the opposition of six members. Emerging Asian countries are expected to remain the fastest growing countries in the world, with an average growth rate of 5.7 percent. Among these, China officially targets 7 percent growth in 2015; however, it might perform below this target given the slowdown in its manufacturing sector, the sharp expansion of domestic debt and shadow banking, and the decline in the housing market. As the authorities try to shift the growth regime from an export-oriented one to an internal demand-driven regime, the lower performance of the manufacturing sector is expected. If the monetary authorities further ease the monetary policy to reduce deflation, then consumer spending is likely to respond positively, which can help promote growth.

Oil prices plummeted in 2014 and pundits predict that commodity prices will continue to slide in 2015. As an expert in the economics of commodity markets, what factors do you think will determine whether the trend continues in the new year?

The Brent benchmark price has dropped by nearly 50 percent from June to December of 2014 due to the excess supply of oil in the global oil market. There is a broad consensus among economists that the trend for this excess supply will continue during the first half of 2015 for two primary reasons. First, the supply of oil is expected to increase further. The expansion of U.S. shale oil production is likely to persist although it will come under financial constraints as the prices continue to fall. In the meantime, the members of OPEC, the group of oil producing countries, are hesitant to make any coordinated cuts in production, as their producers remain profitable until the prices fall to $40 a barrel. Second, the global demand growth is expected to remain weak. One of the key drivers of commodity prices in the recent super cycle has been the rapid pace of Chinese industrialization and urbanization, which has substantially slowed down after the global financial crisis. Growth in other emerging markets is also fairly subdued owing to large capital outflows as the monetary easing in the U.S. is coming to an end. Under these conditions, oil prices are generally predicted to decline below $50 a barrel.

Year-end coverage of the global economy was dominated by the growth of the U.S. economy, China’s economic slowdown, lower oil prices, and the prospect of interest rate hikes. What lesser-debated topic do you predict will play a major role in the 2015 economy?

One of the lesser-debated topics that has the potential to become more predominant is the problem of gender inequality all around the world. Women in both advanced and developing countries face higher unemployment rates and lower wages for equivalent types of work. They also perform a larger fraction of unpaid care work—care of children, spouses, the elderly, and extended family—compared to men. One of the reasons why the issue of gender inequality has begun to receive more attention is that the World Bank and the International Monetary Fund began to recognize that there are macroeconomic gains from attaining a higher female participation rate across the majority of developing countries, and that reducing gender inequality increases the long-term growth potential of those countries that are catching up through improvements in long-term productivity. These institutions also began to recognize gender equality as a human right, and collaborate with the United Nations Women in holding governments accountable in cases of violation of this basic human right.

Another reason why gender equality is likely to receive more attention is that economic research has shown that increasing participation of women in politics in developing countries results in better social outcomes. This includes reductions in maternal and child mortality, improvements in social infrastructure, and more efficient use of education and healthcare spending. Furthermore, with the prospect that there may not emerge a serious rival against Hilary Clinton in 2015, as the Financial Times predicts, the U.S. may elect its first female president. Despite her rather hawkish stance on foreign policy, her election may pave the way for increased participation of women in top ranked positions not only in the public, but also the private sector, where there are major gender disparities.

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