2015: Five Economic Stories to Watch

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  • What happens to oil?  :Saudi Arabia has helped drive down crude prices from roughly $100 a barrel to about $60 by refusing to cut its own production in the face of a global surplus and the unwillingness of other producers to cut their output.
  • The question is whether the Saudis will hold to this strategy until enough high-cost producers including some U.S. shale oil operators are driven from the market or whether they’re seeking some sort of production-sharing agreement with major exporters inside and outside OPEC.
  • What’s clear is that Saudi Arabia doesn’t want to cut output unilaterally.
  • What happens to Europe? : A year ago, the worst of Europe’s currency and debt crisis seemed to have passed,well, maybe not.
  • Unable to agree on a new president, Greece is now headed for a parliamentary election on January 25, with the possibility that the left-wing Syriza party which is committed to ending the austerity policies of the ruling centre-right New Democracy Party might triumph.
  • If Syriza wins and repudiates some debts, there might be spillover to other debtor countries, including Portugal and Spain.
  • Rising interest rates would make it harder for them to service their debts,the crisis could spread.
  • Will the Fed get it right? : Since late 2008, the Federal Reserve has held its benchmark short-term interest rate — the Fed funds rate  at near zero.
  • With the economy strengthening and unemployment dropping below 6 per cent, pressure is building to raise rates to more normal levels.
  • For the Fed, this creates practical problems: It doesn’t want to raise rates too rapidly for fear of disrupting the recovery,but even if the Fed proceeds cautiously, it could be frustrated by private investors.
  • What matters most are long-term rates on home mortgages and corporate bonds — rates largely outside the Fed’s control.
  • If private investors react by raising these rates, the recovery could suffer.
  • Will wages begin to outperform prices? :For most of this recovery, wages have generally stayed even with prices, increasing at about a 2 per cent annual rate.
  • As a result, many workers haven’t received inflation-adjusted increases in wages or salaries for years.
  • Now this could reverse: As labour markets tighten, employers may have to pay more to keep their best or most experienced workers.
  • Meanwhile, lower oil prices may  at least temporarily cut inflation.
  • Together, these forces could produce modest increases in inflation-adjusted wages.
  • This could bolster consumer spending and confidence, strengthening the recovery.
  • Can China maintain strong economic growth? For years, growth rates averaged close to 10 per cent, powered by massive industrial and infrastructure investments and huge trade surpluses.
  • But this was not sustainable, and relying more on consumer spending has caused China to lower its growth target to 7.5 per cent.
  • Since the global financial crisis, China’s debt levels have exploded as loans were dispensed liberally to avoid a slump.
  • Now, China can no longer depend so heavily on borrowed money,a slowdown could have wide ramifications.
  • Commodity-producing countries could suffer because China is generally their largest customer.
  • If China stimulates exports by allowing its currency to depreciate, trade wars might intensify.