Global Economic Outlook - Prudential Financial

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Global Economic Outlook 2015 Year Ahead Outlook

January 2015

2015 Year Ahead - Global Economic Outlook Global Central Bank Policies Desynchronized in 2015 with QE Stimulus in Europe & Japan, Further Rate Cuts & Stimulus in China & Other Emerging Economies vs. Rate Hikes by U.S. Fed & Bank of England Improving Global Growth with Solid Growth in U.S. & U.K., Eurozone Core & Japan Recovering, Eurozone Periphery & Emerging Asia Strengthening, China Stable, Russia & Brazil Struggle John Praveen, PhD Chief Investment Strategist

Low Inflation in U.S., U.K. & Japan. Eurozone faces Deflation Risk. Falling Inflation in Emerging Economies John Praveen’s Global Economic Outlook for 2015 sees desynchronized central bank policies with the U.S. Fed and Bank of England (BoE) starting interest rate hikes while the European Central Bank (ECB) and Bank of Japan (BoJ) undertake fresh QE stimulus, China and other Emerging Economies undertake further rate cuts and stimulus measures. Global GDP growth is expected to improve with continued solid GDP growth in the U.S. & U.K., recovery in Japan and Eurozone Core, Eurozone Periphery strengthening, China stable and improved growth in Emerging Asia. However, growth remains modest in Latin America & Emerging Europe.

Desynchronized Central Bank Policies: Global central bank monetary policies have been synchronized since the 2008 financial crisis. However, in 2015, central bank policies are expected to be desynchronized with the U.S. Fed & U.K. BoE on track to start rate hikes, while the ECB and BoJ are set to expand QE stimulus, China and other Emerging central banks continue to cut rates and undertake other easing measures.

Improved Global GDP Growth: After the growth disappointments in 2014, Global

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GDP growth is expected to improve in 2015 with solid growth in the U.S. & U.K., the recovery in Eurozone Core gaining traction, while the Periphery continues to strengthen with ECB QE stimulus, weaker Euro and lower oil prices. Japan’s GDP growth is on track to strengthen with another fiscal stimulus package, postponement of the 2015 tax hike, lower energy prices, fresh BoJ stimulus, and the weak yen supporting exports. China GDP growth is expected to remain stable around 7%, while GDP growth is expected to strengthen in India, Taiwan, Korea and Indonesia. However, Brazil and Russia are expected to continue to struggle leading to modest growth in Latin America & Emerging Europe.

Inflation is expected to remain low in the developed and emerging economies in 2015 as improving GDP growth is likely to be offset by weak oil and commodity prices. This is likely to prompt the ECB and the BoJ to undertake/expand aggressive QE stimulus, while the Fed and BoE could delay rate hikes into late 2015. Inflation in Emerging Asia is expected to remain low and below central bank targets. In Emerging Europe, deflationary pressures in Poland, Czech Republic and Hungary are likely to prompt rate cuts. Inflation is likely to remain elevated in Russia and Brazil forcing the central banks to raise rates.

*Prudential International Investments Advisers, LLC. (PIIA) is a business of Prudential Financial, Inc., (PFI), which is not affiliated in any manner with Prudential plc, a company headquartered in the United Kingdom. For informational use only. Not intended as investment advice. See “Disclosures” on the last page for important information.

Global Economic Outlook

2015 Year Ahead Outlook

January 2015

Desynchronized Central Bank Policies with QE Stimulus by ECB & BoJ, Further Rate Cuts & Stimulus in China & Other Emerging Economies vs. Rate Hikes by Fed & BoE • Global central bank monetary policies have been synchronized since the 2008 financial crisis. However, in 2015, central bank policies are expected to be desynchronized with the U.S. Fed & U.K. BoE on track to start rate hikes, while the ECB and BoJ are set to expand QE stimulus, China and several other Emerging central banks continue to cut rates and provide fresh stimulus. • The ECB is on track to undertake full-fledged QE with broad-based buying of sovereign debt and corporate bonds. The ECB has overcome internal opposition to QE, especially from Germany, and has laid the ground work to undertake full-fledged QE. The ECB has indicated that it will expand its balance sheet by €1trn to around €3trn. The ECB has already started purchase of Asset Backed Securities and covered bonds in Q4 2014. • The Bank of Japan has increased the pace of balance sheet expansion, accelerating the purchases of Japanese government bonds to ¥80 trillion from ¥50 trillion, and tripled its purchases of ETFs and REITs to ¥3tr and ¥90 billion, respectively. The bank is likely to increase its asset purchases further during 2015 with inflation running well below its 2% target and to support the fiscal spending measures as a result of the government’s renewed spending to boost the economy. • The U.S. Federal Reserve ended its Quantitative Easing program in November 2014. At its December meeting the Fed dropped the language that it will keep the Fed funds rate at current near-zero level for a “considerable time” but reassured that it “can be patient in beginning to normalize the stance of monetary policy.” This suggests that the Fed rate policy is data-dependent, implying that the first rate hike could occur in early or late 2015, depending on the evolution of economic data. Current expectations are for the Fed to begin raising rates in mid 2015. However, with inflation already low (1.3% in November) and the collapse in oil prices likely to put further downward pressure on headline inflation, the Fed could push rate hikes into late 2015. The Fed also released its Summary of Economic Projections, leaving its 2015 forecast for Real GDP growth unchanged (between 2.6%-3%), but lowered its forecast for PCE inflation (to 1.0%-1.6% from 1.6%-1.9%). • The Bank of England (BoE) is likely to be the first developed central bank to start raising interest rates. The BoE is on track to start raising U.K. rates in Q2 2015 given the strength of the U.K. economy. However, low inflation could also prompt the BoE to delay the start of rate hikes. • Several emerging central banks, including China and India are on track to cut rates or undertake other easing measures in 2015. The People’s Bank of China (PBoC) is likely to continue rate cuts and targeted easing in 2015 after the November rate cut and earlier stimulus measures. Low inflation gives the PBoC room to cut rates further in 2015 and provide fresh stimulus. In India, the plunge in oil prices helps narrow the current account and fiscal deficits and has led to a broad-based decline in different inflation measures (CPI, WPI & GDP deflator). CPI inflation is down to an eight year low of 4.4% YoY in November. With CPI inflation likely to undershoot the Reserve Bank of India’s target (6% in March 2015), the bank is likely to start cutting interest rates in early 2015, ahead of the U.S. Fed starting rate hikes. Korea and Taiwan are also likely to cut rates further as inflation continues to undershoot central bank targets and growth remains below trend. In Eastern Europe, deflation risk is likely to prompt rate cuts in Hungary, Poland, and Czech Republic in 2015. The exception is Russia where geopolitical tensions, oil price decline and Ruble depreciation continues to push policy rates higher. In Latin America, with Brazilian inflation hovering at the ceiling of the central bank target and currency weakening, the central bank is likely to continue rate hikes in 2015. In Mexico, the central bank, Banxico, is expected to follow the Fed as they start to hike rates in 2015.

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For informational use only. Not intended as investment advice.



January 2015

Developed Economies GDP Growth: Improving Growth with Solid Growth in U.S. & U.K., Eurozone Core & Japan Recovering • After the growth disappointment in 2014, Global GDP growth is expected to strengthen in 2015 with growth in the U.S. & U.K. remaining solid, Japan and Eurozone Core economies recovering, and the Periphery continues to strengthen. China GDP growth is expected to remain stable while GDP growth is expected to strengthen in Emerging Asia led by India, Taiwan, Korea and Indonesia. However, Brazil and Russia are expected to continue to struggle leading to modest growth in Latin America & Emerging Europe. • Global GDP growth disappointed in 2014 with GDP contraction in Japan (Q2 & Q3), Brazil (Q2 & Q3), Russia, and weak growth in Eurozone Core. Global growth improved in H2 with continued solid GDP growth in the U.S. and U.K., Core Eurozone began to stabilize while the Periphery remained healthy, and Japan rebounded in Q4. • Global GDP growth is expected to improve in 2015 led by continued solid GDP growth in the U.S. and U.K. U.S. GDP is expected to grow around 3% in 2015 after posting around 2.2% growth in 2014. U.S. GDP growth in 2015 is likely to be driven by the private sector continuing to strengthen and on the public side, there should be no fiscal drag. Consumer spending is expected to strengthen to around 2.7% in 2015 after a sluggish 2.2% in 2014 with pent-up household demand, decline in unemployment rate, and improving personal income. Consumption spending is also supported by the sharp decline in oil prices during 2014 and the wealth effects from the rising stock market. Business investment spending is expected to remain strong around 5.7% after posting 6% growth in 2014 with companies increasingly confident to invest, decreased slack in production capacity and with strengthening outlook for consumer spending. Housing remains healthy but likely to make a smaller contribution with still tight subprime mortgage credit. Trade likely to be a smaller drag with lower oil prices and rising exports due to improving growth in Eurozone, Japan and Emerging Asia. • Eurozone Core economies are on track to recover and the Periphery strengthens with ECB launching fullfledged QE, weak Euro and lower oil prices. The recovery in the Core Eurozone economies should also be supported by easing of Ukraine tensions, while the Periphery economies are boosted by fading of financial crisis effects. With the ECB set to launch full-fledged QE including buying sovereign debt, financial conditions should continue to support domestic growth while further weakening of the Euro should boost exports. Further, the sharp decline in oil prices should result in a tax cut for consumers. The extra real purchasing power and the reduced input costs for companies should provide a boost worth 1% of GDP to Eurozone demand over four to six quarters. • Japan’s economy is expected to strengthen further in 2015 after rebounding in late 2014. GDP growth is expected to get a boost from another fiscal stimulus package, postponement of the 2015 tax hike, lower energy prices, fresh BoJ stimulus, and further decline in the yen supporting exports. Earlier in 2014, Japan’s GDP grew just around 1% with a sharp GDP contraction in Q2 and Q3 due to the consumption tax hike in April 2014.

Emerging Economies Growth: Improved GDP Growth in EM Asia led by India, Taiwan, Korea. China Stable. Modest Growth in Latin America & EM Europe as Brazil & Russia Continue to Struggle •

Among emerging economies, GDP growth is expected to improve in Asia but remain modest in Latin America and Emerging Europe. Commodity price declines have started to help importers (India, Turkey) relative to exporters (South Africa, Brazil & Russia) and this is likely to continue into 2015 as commodity prices are expected to remain weak in the first half of 2015. Among Emerging Asian economies, GDP growth in India, Taiwan, Korea and Indonesia is on track to strengthen with expected interest rate cuts, lower oil and commodity prices. China GDP growth is expected to remain stable. However, Brazil & Russia are expected to continue to struggle with rate hikes and lower oil and commodity prices.

• China’s GDP growth is expected to remain stable around 7% with further rate cuts and stimulus from the PBoC. In India, GDP growth is expected to strengthen to 6.5% YoY with a pickup in both investment spending,

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January 2015

especially infrastructure spending, and consumption. Further the RBI is expected to cut rates in early 2015, boosting growth. GDP growth in Taiwan and Korea is expected to pick up to 3.7% and 3.6%, respectively, in 2015 helped by a recovery in exports on a broadening developed market recovery beyond the U.S. • GDP growth in Brazil is likely to remain weak, around 1% amidst weak global commodity prices and President Dilma Rouseff unlikely to deliver much needed economic reforms. Mexico’s economy is expected to strengthen in 2015 to around 3.5% with a strong recovery in domestic demand along with strong manufacturing and construction activity. Russia’s economy is expected to contract in 2015 as oil prices are expected to remain weak in H1 and under the continued impact of sanctions, while Turkey’s economy is expected to be relatively stronger with a falling current account deficit and declining inflation.

Inflation Outlook: Low Headline & Core Inflation in U.S., U.K. & Japan. Deflation Risk in Eurozone. Falling Inflation in Emerging Economies excluding Latin America & Russia • During 2014, inflation in developed economies was in a steady decline to under 1.5% in the U.S. around 1% in the U.K., and below 2% in Japan. Deflation risk increased in the Eurozone with inflation under 0.5%. In late 2014, the 40% plunge in oil prices pushed headline inflation below core inflation. In late 2014, U.S. headline (core) inflation eased to 1.3% (1.7%), Eurozone headline (core) inflation eased to 0.3% (0.7%), U.K. headline (core) inflation eased to 1% (1.2%). Japanese headline (core) inflation rose to 2.9% (1.7%) in October from 1.6% (1.2%) in early 2014. • Inflation stabilized in emerging economies in 2014, amidst sluggish growth and a decline in oil and commodity prices. In emerging Asia, inflation eased in China, India, Taiwan and Korea. In emerging Europe, deflationary pressures rose in Poland, Czech Republic and Hungary. Inflation rose in Russia with a depreciating Ruble and policy induced food restrictions. In Latin America inflation remained elevated in Brazil and Mexico. • Inflation is expected to remain low in the developed and emerging economies in 2015 as improving GDP growth is likely to be offset by weak oil and commodity prices. In fact, the over 40% plunge in oil prices is likely to push headline inflation into negative territory in Eurozone and below 1% in the U.S., U.K. and Japan. This is likely to prompt the ECB and the BoJ to undertake/expand aggressive QE stimulus, while the Fed and BoE could delay rate hikes into late 2015. • In the Emerging Economies, inflation in Emerging Asia is likely to remain below central bank targets, prompting further rate cuts and stimulus in China, fresh rate cuts in India and other economies. In emerging Europe, Poland, Czech Republic and Hungary are likely to see rate cuts with deflationary pressures increasing. Inflation is likely to remain elevated in Russia and Brazil forcing the central banks to continue to raise rates. Follow us on Twitter: www.twitter.com/prustrategist Disclosures:

Prudential International Investments Advisers, LLC. (PIIA), a Prudential Financial, Inc. (PFI) company, is an investment adviser registered with the Securities and Exchange Commission of the United States. Pramerica is a trade name used by PFI and its affiliated companies in select countries outside of the United States. PFI, a company incorporated and with its principal place of business in the United States of America is not affiliated in any manner with Prudential plc, a company headquartered in the United Kingdom. The commentary presented is for informational purposes only, and is not intended as investment advice. This material has been prepared by PIIA on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information. All opinions and views constitute judgments of PIIA as of the date of this writing, and are subject to change at any time without notice. There can be no assurance that any forecast made herein will be realized. Distribution of this information to any person other than the person to whom it was originally delivered and to such person’s advisers is unauthorized and no part of this material may be reproduced or distributed further without the written approval of PIIA. These materials are not intended for distribution to, or use by, any person in any jurisdiction where such distribution would be contrary to local law or regulation. The companies, securities, sectors and/or markets referenced herein are included solely for illustrative purposes to highlight the economic trends, conditions, and the investment process, but may or may not be held by accounts actually managed by PIIA. The strategies and asset allocations discussed do not refer to any service or product offered by PIIA or by its affiliates The global asset and strategy allocation models presented are hypothetical allocation models shown for illustrative purposes only, and do not necessarily reflect the management of any actual account. Following the allocation recommendations presented will not necessarily result in profitable investments. Past performance is not an assurance of future results. Nothing herein should be viewed as investment advice to adopt any investment strategy, nor should it be considered an offer to provide investment advisory or other allocation services. © 2014 Prudential Financial, Inc. and it related entities. Prudential, the Prudential logo and the Rock symbol are service marks of Prudential Financial, Inc. and it related entities, registered in many jurisdictions worldwide.

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