Investment Bank Economists See Improving U.S. Growth in 2015

Several economists at investment banks have predicted strong and improving economic growth in 2015, leading to growing confidence in higher interest rates for U.S. bonds.

Goldman Sachs has published its forecasts for 2015, which predict global GDP growth of 3.4%, above 3% growth in 2014 as both developed and emerging markets see growth acceleration from the prior year. Developed markets expect to grow 2.2% and emerging markets 4.9%, both higher than the 1.9% and 4.6% rates of 2014.

Several economists at investment banks have predicted strong and improving economic growth in 2015, leading to growing confidence in higher interest rates for U.S. bonds.

Goldman Sachs has published its forecasts for 2015, which predict global GDP growth of 3.4%, above 3% growth in 2014 as both developed and emerging markets see growth acceleration from the prior year. Developed markets expect to grow 2.2% and emerging markets 4.9%, both higher than the 1.9% and 4.6% rates of 2014.

At the same time, Goldman Sachs expects U.S. growth acceleration to outpace that of any other region, as year-over-year growth goes from 2.2% predicted in 2014 to 3.1% in 2015. Meanwhile, Japan expects to see a trebling of its growth rate, from 0.3% to 0.9% while the Eurozone grows at 0.9% in 2015. China expects to see slower growth at 7%, down 0.3% from 2014.

While many economists see a recession taking hold in Russia, Goldman Sachs economists see a turnaround, with the economy rising 1% in 2015. India and Brazil will also see growth.

Divergent Growth

Meanwhile, asset management firm BlackRock sees a growing divergence between different economic regions. Like Goldman, BlackRock expects the U.S. to see stronger growth. “The U.S. economy is in a cyclical upswing—and is one of the world’s few major economies expected to accelerate in 2015,” noting that employment, housing, and capital expenditure growth “all point to a sustainable recovery.”

Meanwhile, European growth is likely to be muted or negative, and BlackRock argues that the divergence between ECB monetary policy and the Bundesbank’s push for austere fiscal policy cannot continue. “The current system can muddle through for another five years but does not look sustainable in the long run. It is bound to either integrate deeper over time—or break up,” the report said.

BlackRock predicts 2017 to be an “annus horribilis” in which a UK referendum on EU membership and key elections in Germany and France test the integrity of the monetary union and the EU itself.

Emerging markets expect to see challenges in 2015 with potential deflation and weakening currencies. BlackRock argues that South Korea would benefit from “further easing by the Bank of Korea,” pointing to Japan’s success with Abenomics as a guide. However, in the short term, emerging markets expect slower growth. “Weak EM currencies and equity prices have offset the lack of export growth to some extent. Yet countries could do more to unlock their potential: improve infrastructure, institutions and education, and enact reforms to make their economies more competitive,” the report said.

Looser Monetary Policies or Rising Rates?

While there is broad agreement on growth trends, conflicts between investment bank outlooks rest on the future of monetary policies around the world. BlackRock believes quantitative easing, which has successfully yielded inflation despite a recessionary backdrop in Japan, will become a more common strategy, noting that China has recently worked to ease lending conditions. “Lackluster growth and low inflation expectations support looser monetary policy elsewhere,” BlackRock said in its report.

Goldman Sachs, on the other hand, is pointing to a U.S. interest rate hike in 2015. “Based on our below-consensus forecasts for wage and price inflation, we expect the first fed funds rate hike to occur after June 2015; our base case is September,” said Jan Hatzius, Chief Economist at Goldman Sachs. Goldman believes the U.S. dollar is likely to see more strength in 2015, bolstered by the rising rates.

While disagreement about monetary policy keeps expectations mixed for 2015, most investment banks remain confident that both equities and bonds, particularly in the United States, will see better performance in 2015 than in 2014, when the S&P 500 rose more than 13% and 10-year U.S. Treasury yields fell 78 basis points to 2.2%.