It might be helpful to take a reading on various countries at the beginning of 2015 to help investors decide where to place their bets in the coming year. Some trends are affecting all major world economies while others are country specific.
World economies are desperately trying to avoid deflation. Most governments have decided to print more money through various schemes. Most of them see a 2% inflation goal as the way to stimulate growth. The fundamental problem has been that governments saw only one piece of the equation. The underlying malaise is that prices have risen way more than wages. The world is wage poor. Consumers can only buy the basics. As a result growth is at a standstill or falling backward into recession.
During the hey days governments leveraged themselves beyond reason by issuing bonds that now they are not able to repay. Bankers have demanded FACE value for their investments forcing countries, especially in Europe to gut their workforces throwing millions out of work.
The two forces of low wages and high unemployment have brought the world to a standstill. Let’s look at individual countries to see how it affects them.
Greece. The IMF gave Greece loans to repay their debts with the condition that they balance their budgets. Greece was forced to gut their public employees, throwing millions out of work. Now Greece is saying enough is enough. The Prime Minister was unable to sponsor his candidate, forcing Greece to hold national elections. The outcome will determine if Greece ditches the Euro and goes back to their own currency. Greek bond rates have risen to 12.2%.
France is the second largest economy in Europe. Jobless claims set a record with 3.48 million unemployed.
Russia. Russia invaded the Crimea and is facing economic sanctions and falling oil prices. The sanctions have deterred foreign investment. This created a stampede for investors to pull their money out of Russia. This year $100 billion left Russia. Russians have been huge buyers of foreign currencies and selling rubles. There has been heavy withdrawals of bank deposits. The ruble that was 30-35 to the US dollar has risen at one point to 80 to the dollar. The Russian stock market has plunged 40%. Falling oil prices added more fuel. The combination of these factors is gutting the government’s reserves. International reserves have shrunk by 20% this year. At this rate Russia’s reserves can only last three years. The government was forced to bail out a large bank, Trust Bank, to the tune of $2.4 million in loans. Russia was forced to sell some of its gold. It’s gold reserves are down by 15.7 billion in 2014. Interest rates were raised to 17%. Mortgage rates have risen to 12%. Putin even placed a cap on the price of Vodka.
Prime Minister Shinzo Abe’s government raised the sales tax in April 2104. Since then consumer spending has fallen sharply during two consecutive quarters, throwing the country into recession. In November Abe introduced a new spending package of $29 billion to try a pump up the economy.
China is a mixed bag. Some commodity sectors have lost revenue, while technology and automobile manufacturing gained. Coal and oil an gas fell 44% and 13.2% respectively. Telecommunication rose 20%. Auto manufacturing was up 16.7%.
China is providing $800 billion for lenders to support growth.
One land mine to watch for is the $1 trillion in unhedged foreign debt. Speculators have bought cheap dollars then used them as collateral to get more credit. With the US dollar rising against major world currencies and interest rates scheduled to rise this year, this situation could prove to be disastrous when these debts need to be repaid.
The US economy is sailing into 2015 with a 5% growth rate in Q3. The price of West Texas Intermediate crude oil has fallen to $54.73 per barrel, giving consumers $14 billion in extra spending dollars. Gas at the pump is averaging $2.25 per gallon. The US dollar is on a strong rally with it trading at 90.31 for the March futures contract. The US dollar is traded against a basket of currencies. Consumer confidence is up and consumer spending rose .6% in November.
The elephant on the table for 2015 is wage growth. For the world economy to expand, wages must rise. Otherwise 2015 will see continued pullback in spending. In the United States consumer spending accounts for 70% of our economy.