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Altered Perceptions
This year’s two biggest surprises for the markets – falling international bond yields and oil prices – are completely consistent with ECRI’s prescient call on secular shifts in developed economies, and its cyclical calls on global growth. Furthermore, when made, those forecasts were diametrically opposed to the consensus view.
On the cyclical front, by the early summer of 2014, with crude oil prices at their highest levels in nearly a year, a widely-followed Wall Street house proclaimed that “the long-awaited global recovery appears to be getting on track, lifting commodity demand.” They justified the call by noting: “our economists continue to see global growth accelerating to above trend later this year and into 2015.”
The very next day, ECRI warned of a looming slowdown in global growth (International Essentials, July 2014), and over the next few months global growth concerns helped to slash oil prices by almost a third. Then, a further price slide was triggered by the late-November announcement by oil producing countries that they would maintain production levels. But with most of the price drop predating that announcement, the key catalyst for the downturn in prices was the shift in the consensus view on global demand that also pressured the prices of other industrial commodities, rather than supply concerns that have dominated headlines.
Of course, the narrative has since shifted, rationalizing these structural and cyclical shifts as largely positive developments. Thus, the Japanese recession that thoroughly blindsided the consensus – but not our indicators – as well as the fears of Eurozone deflation, are now welcomed by the markets, in view of the actual or expected policy response in the form of quantitative easing (QE).
In addition, cyclical growth prospects for China are critical to people’s expectations for 2015, and here an updated view from our array of Chinese Leading Indexes is informative.