An Economy in Waiting

Outlook for the world economy in 2015


IESE Business School

(Left to right) Alfredo Pastor, Xavier Vives and Núria Mas during a previous session of the meeting / Photo: Jordi Estruch

“Global demand is very weak,” commented IESE Prof. Alfredo Pastor, paraphrasing Martin Wolf, the renowned Financial Times columnist who recently published an article titled The Curse of Weak Global Demand.

Uneven Growth

In an overview of the world economic situation, Pastor noted that the IMF predicted that global GDP growth would be 3.8% in 2015 but that it would be very uneven. For advanced economies, the IMF predicted an average growth of 2.3%, but also considerable variation within the group. It expected GDP in the U.S. to increase by 3.1% while in the eurozone it would be only 1.3% (1.7% in Spain). According to IMF figures, U.S. GDP is already 6% higher than pre-crisis levels while in the eurozone it is 4% lower.

Weak Demand

The current weakness in global demand had many causes, Pastor said. Referring to China, he commented, “we know they are trying to carry out an economic transition based on internal demand, particularly consumer demand.” He noted that this would take time because China's growth still depended largely on exports that were "not going as well as they were, because the rest of the world isn’t going as well either.” China, he said, was also experiencing competition from Japan whose exports had been boosted by the depreciation of the yen.

The main cause of weak demand in the eurozone, according to Pastor, was a hangover from the recent economic crisis. He defined this as a combination of the debt burden and a lack of confidence as people remained jittery. This, he noted, was clearly the case in Spain.

Pastor said that there were “other causes, less certain, but still worth mentioning,” alluding to those who insisted that slow growth was an inevitable consequence of falling populations, flat productivity and low levels of investment. Pastor said that it remained to be seen how development would progress in the long term. In the eurozone at present, he said, “there’s a lot of saving but a much lower level of investment. This reduces the aggregate demand because the difference is reversed elsewhere.” Germany was a prime example of the situation, he noted.

Slump in Oil Prices

Lethargic global demand was also having an effect on energy prices, particularly on oil, according to Pastor. Crude's current five-year low of $80 a barrel was, he said, closely related to weak global growth.

Prof. Xavier Vives pointed to other reasons behind the fall in the price of crude, including pressure to reduce carbon dioxide emissions and combat climate change. He also noted the development of alternative oil sources and techniques, such as shale gas and fracking, especially in the United States. The US may soon go from being a gas importer to an exporter with a subsequent reduction in its dependence on oil.

Crude's lower price was also a consequence of the differing needs and policies of Organization of the Petroleum Exporting Countries (OPEC) member countries, according to Vives. He said that the countries most dependent on oil income, such as Venezuela, were trying to offset the loss of revenue by selling greater quantities. But, he explained, this had the effect of further depressing the price. Other countries, such as Saudi Arabia, were reducing production to prevent further price drops.

Vives stated his belief that the fall in the price of oil was good news as it could result in up to one point of GDP growth in Spain. Although geopolitical tensions continued to influence energy prices, he noted that oil wasn’t expected to fall below $70 a barrel.

Finally, in regard to industrial policies designed to stimulate renewable energy, Vives said that in some countries, such as Spain, Germany and Japan, the incentives had not been well thought out. In his opinion, the justification for subsidies was based on a misreading of the market. In other countries, such as China and Taiwan, he felt this was not the case and that they would have an international competitive advantage in the medium and long term as a result.