Jill on Money: Economic crystal ball

By Jill Schlesinger

Tribune Content Agency

 

It may be futile to try to predict the future, but it is January, so here are some guesstimates for what might happen in 2015.

 

  Global Economy: After increasing at an estimated 2.4 percent rate in 2014, economists expect that U.S. GDP will pick up to 3 percent this year, which would be the strongest growth in a decade. Since 2000, the fastest real GDP growth was 3.8 percent in 2004, and the fastest growth for the recovery was 2.5 percent in 2010. 

 

  The drivers of growth include: consumers, who after paying down lots of debt, should see wage gains and will continue to enjoy the benefits of low energy prices; state and local governments, which have stopped slashing budgets and may spend a bit more freely; and the housing market, which after taking a breather in 2014, should contribute more to the economy in 2015.

 

  Outside the U.S., the picture is more complicated. China’s double-digit growth rates are a thing of the past, as the world’s second largest economy attempts to impose controls that are expected to keep GDP at six to 7 percent in the year ahead. Japan and Europe are still battling low prices, which is why central banks in both areas are likely to crank up efforts to defend against inflation. 

 

  The story of the run-up to the financial crisis was the outperformance of emerging nations over their developed country counterparts, but growth among the diverse countries has been all over the place recently. Emerging markets will continue to diverge, with countries that have not addressed economic imbalances, like Russian, Brazil and Venezuela struggling, while more balanced economies, like India, Thailand and Chile should be better positioned for growth.

 

  2015 Year of the Raise: If 2014 was the year of the job (2014 was the best year for job creation since 1999), economists are hopeful that 2015 will be the year of the raise. Wage growth has remained stubbornly at 2 percent during the recovery, but this year, the improving economy and labor market should help wage growth finally start to outpace inflation.

 

  Federal Reserve Rate Hikes: The 2014 transition from the Ben Bernanke Fed era to the Janet Yellen regime was fairly smooth. Under her direction, the central bank slowly unwound its bond buying policy and announced its conclusion at the October meeting. With bond buying over, the big question for 2015 is: “When will the Fed FINALLY increase short-term interest rates?” Reading between the lines of central bank speeches, statements and press conferences, most believe the first rate hike will occur in the third quarter of the year. Goldman Sachs analysts’ noted that once the Fed starts the process, it could move faster than the market now expects.

 

  Oil: The biggest market story of 2014 was the swift and steep 46 percent plunge in crude oil prices. The catalyst for the drop was a combination of softening demand in China, Europe and Japan, combined with a surge in U.S. production. Because the price of oil determines about two-thirds of the price of a gallon of regular gas, drivers were delighted to enjoy the near 40-percent dive from a national high of $3.70 a gallon in April 8th, to $2.24 on December 31st.

 

  With the cheap prices continue this year? At her last press conference of the year, Janet Yellen called low oil a “transitory” phenomenon, which loosely translated means, “Don’t get too used to those cheap gas prices!” The reason is that supply and demand will surely change. If the global economy picks up, so too will demand for oil, but these changes often occur slowly, which is why some economists are predicting that oil prices will likely remain in a range of $50 to $75 a barrel in 2015.

 

  Geopolitical: 2014 was filled with a series of scary events: unrest in Ukraine; Russian annexation of Crimea; an outbreak of violence between Israel-Hamas; the rise of ISIS; pro-democracy protests in Hong Kong; and an outbreak of Ebola. Economists call these events “exogenous,” which means coming from outside. The practitioners of the dismal science hate exogenous events, because they are impossible to predict. Investors also detest these events, because they often can have a significant negative effect on prices. We should probably count on another year of unrest around the globe.