The underlying momentum in global economic growth moved to its best pace in four years during the second half of 2014. Moreover, labour market dynamics, income trends, falling oil prices and low interest rates bode well for further strengthening in the global cycle. Nevertheless, financial markets have gone through a volatile period in recent weeks. Doubts about central bank policies, rising deflation risks, the fallout from the oil price declines and renewed fears over Greece have clearly depressed investor optimism.

Inflation expectations driven by oil prices

Markets and fundamentals show diverging trends

Source: Reuters Thomson Datastream, ING IM (18/01/2013 – 20/01/2015)

ECB delivers with asset purchase plans

At its January 22 meeting, the European Central Bank (ECB) presented plans to buy EUR60 billion a month in assets including government bonds, debt securities issued by European institutions and private sector bonds. The purchases will start in March and run at least through September 2016. The plans indicate the ECB’s balance sheet will increase more rapidly and become larger in the next two years than markets had been anticipating. We now have more confidence that the ECB will be prepared to step up the pace of easing further if this should be needed. Our base case is for the current pace of asset purchases to continue until well into 2017 and for policy rates to remain at current levels until sometime in 2018 at least.

Moderate upswing of the global economy in 2015

Our take on the global economy is that its growth rate will accelerate to slightly above 3% in 2015. In this respect, we note that the momentum in global retail sales has improved sharply form below 2% annualized at the start of the summer 2014 to around 6% annualized at the end of last year. Due to the strong inverse correlation between retail sales and the oil price, we expect a further increase of retail sales in Q1 2015. We also expect the windfall from lower oil price to support service spending as well. In addition, the momentum in global industrial production has also improved in recent months.