The unexpected fall in the Brent crude oil price to below $60 a barrel is the biggest known unknown as we enter the next secular New Year. It will shape events in the global economy, the British economy and the Middle East. The world enters 2015 at a crossroads.
The major Anglo-Saxon economies are doing very nicely thank you. Britain, and London in particular, will continue to prosper. That success is partly the flipside to the crisis in Russia, the Ukraine and the Eurozone as the UK maintains its “safe haven” status. It is a good home for the wealthy and the middle-classes from overseas, seeking to protect their capital.
Elsewhere, the Eurozone and Japan are on the brink of stagnation and deflation. The dislocation in Europe is particularly disturbing in that it risks that the trends to political extremism on the right and the left risk the build-up of xenophobia with minorities, including Jewish communities, caught in the cross-hairs. China is slowing and the main Middle East oil exporters face the twin challenges of strategic upheaval and sharply reduced revenues.
Israel’s generally robust economy is suffering from security upheavals following Operation “Protective Edge”, the uncertainty of an upcoming general election and continued internal stresses created by wide income inequalities. But its status as one of the world’s leading hi-tech centres outside of Silicon Valley will be a continued source of strength.
One of the big surprises of the past year has been the prevalence of themes relating to the cyber-economy with the battle over Sony’s film The Interview symptomatic of the challenges ahead for the digital world. Amid this background of turmoil, uncertainty and technological change, here are my top 10 forecasts for the economy, business and finance in 2015:
1. Interest Rates to Rise
Borrowing costs have remained at record low levels in Britain (just 0.5 per cent) and the US since the onset of the Great Recession in 2006. The US Federal Reserve will start the process of normalisation by raising its interest rates in the second quarter of 2015. The Bank of England will follow with the first rate rise in the third quarter of the year well after the May 2015 election. Borrowers, including families taking out mortgages, should not panic the rate rises will be small and gradual so as not to scare the horses.
2. UK elections
The outcome will be a minority Tory government headed by David Cameron with huge Westminster gains for Scottish Nationalists. The Balkanisation of UK politics will demand new constitutional and financial settlements. The devolution of economic and tax-raising powers to the regions will gather momentum. Scotland already has been granted income tax-raising and band-setting powers. Northern Ireland will get powers over corporation tax and powerful regional mayors, most notably in London and Manchester, will gain their own fiscal freedom
3. Debt defaults
Russia will take its revenge for Western sanctions and its falling energy income by defaulting on some of its debts to Western banks.
This will be particularly harmful to French banks notably Societe Generale, one of the biggest European lenders to Moscow. The rising influence of the left-wing Syriza party in Greece, will mean that Greece will become the first Eurozone economy to default on its bonds and seek a renegotiation if its debt. This will put pressure on other peripheral Eurozone members to do the same.
4. Bids and deals
There will be major consolidation in the telecom and media sector driven by convergence of technologies. The BT £12.5 billion takeover of Orange-owner EE will be merely the start. Vodafone will do a deal with John Malone’s Liberty Global owner of Virgin Media. Rupert Murdoch’s 21st Century Fox will make another effort to buy the minority 60.1 per cent interest in Sky (now incorporated Sky Deutschland and Sky Italia) it doesn’t own. American players will tighten their grip on UK content following the Viacom purchase of Channel 5 from Richard Desmond. The new BBC chair Rona Fairhead will begin the process of replacing the licence fee with a subscription model. Internet giants Facebook, Twitter and others will be required to accept tighter control over content.
5. Oil Market
Energy prices will remain subdued for much of 2015. The United Kingdom government will be forced to provide new incentives to North Sea oil explorers and to frackers in order to prevent investment in new fields shuddering to a halt. The US will move towards oil self-sufficiency. A number of Gulf states will face severe pressure on their finances and may cancel expensive domestic projects. Iran’s economy will deteriorate further placing pressure on the Rouhani-led government to make concessions in the ongoing nuclear talks with the West and to halt the movement of heavy arms into Syria.
6. Israeli Economy
After weakening in 2014, Israel’s economy will revive in 2015 with growth to reach 3 per cent. Output will be supported by the end of the Gaza conflict, improvement in the economies of major trading partners, including the UK, and a more competitive exchange rate.
The risk of overheating in the property market, fuelled by French and other European buyers, will increase. The strong upward trend in Israel-UK trade that increased by 28 per cent in the first eight months of 2014 will continue to strengthen.
7. UK Property
After a record-breaking 2014, capital values in prime UK real estate will rise in 2015 but at a slower pace.
Foreign buyers from Latin America, the Middle East and Russia will be dominant. Qatar will win control of Songbird Properties, the principal owner of Canary Wharf. Tesco will be a forced seller of sites all over Britain as it seeks to plug a hole in its balances sheet. House-building will pick up pace buoyed by housing associations who will have raised £20 billion in the bond markets. But totals of new houses built will fail to reach the 200,000 a year peak rates hit in the 1960s, and seen as more than necessary to meet the demands of a surging population.
8. Pension Reforms
George Osborne’s radical reform of pensions that gives individuals the opportunity to invest (or spend) their own pensions will come to fruition in April 2015. The annuities market that has collapsed will revive a little as some retirees and fund managers will opt for a safe and predictable option. Insurance providers will develop new ranges of low-cost products that spread the risk among bonds, equities and real estate. As in the recent past, however, the more rapacious manufacturers will sell people unsuitable products. The seeds of the next mis-selling scandal will be sown. The government’s promised independent advice service will be inadequate, leading to widespread consumer complaints. Most pensioners will not behave like lottery winners and buy a Ferrari but invest sensibly in ISAs, government bonds, national savings, venture capital trusts and sensible funds.
9. Stock Markets
It was the Nobel Prize-winning US economist Paul Samuelson, the founder of a Jewish dynasty of economic excellence at the Massachusetts Institute of Technology who once said “the stock market has forecast nine of the last five recessions”. The reverse is also true. Predicting the direction of stock markets is a mug’s game. What is clear is that low bond yields, averaging just 0.7 per cent in Germany, make equity investment look attractive. The average dividend yield of UK equities is 3.3 per cent. The fall in the energy price has removed some of the shadow cast by Ed Miliband over energy utilities with the National Grid offering a good yield.
10. Banks and Retail
Investors in banks will need to adjust the idea that requirements for ever more capital and the regulatory risk — in the shape of fines for foreign exchange manipulation and money laundering — are likely to increase. Consolidation among some of the smaller challenger banks such as TSB and Virgin could provide some investment opportunities. The supplier scandal at Tesco together with price competition from overseas-owned chains Lidl, Aldi and Asda will mean that profitability among the quoted supermarkets such as Tesco, Sainsbury and Morrisons will be very constrained. Pickings will be short among general retailers, too, with the quoted discounters including Poundland and B&M offering some opportunities; 2015 could be a better year for Marks & Spencer as its investment in food stores, online shopping, improvement in the overseas estate and better fashion ranges start to pay back. Patience may be rewarded.
