European growth to match China's?

LONDON - The euro zone economy will grow just as fast as China's in 2015. Put two "contrarian" predictions together, and you get this startling scenario.

The frailties of economists' forecasts, notably those which failed to spot the global crisis in 2008, are well documented. But sometimes they can be correct, and it's not always those clustered around the majority "consensus" view which get it right.

As scenarios go, the prospect of the now feeble euro zone economy matching mighty China is at the outlandish end of the spectrum. But with volatile oil prices, a widening divergence in central banks' policies and a growing global debt burden promising a wild ride for economies and financial markets next year, it's not impossible.

This is indeed what would happen if two of the most eye-catching contrarian predictions were to bear fruit: JP Morgan's view that euro zone growth could rise to 2 per cent, and Fathom Consulting's outside bet that China's housing and credit bubbles might burst, slashing its growth rate also to 2 per cent.

Neither forecaster regards these figures as the most likely outcome, and they're separate, conflicting scenarios; the euro zone would struggle to grow much if China slowed dramatically, an event that would probably hurt the entire global economy.

Nevertheless, by forsaking the consensus and thinking the unthinkable, the contrarian forecaster can at least stand out from the crowd and stimulate debate.

Many consensus forecasts for 2015 are much as they were for 2014 - a stronger dollar, higher yields on US Treasury and other government bonds, an outperforming US economy, further gains in global stocks, and central banks doing whatever it takes to prevent low inflation turning into deflation.

Some of those came to pass but few people foresaw this year's sharp fall in US and global bond yields, or the near-40 per cent collapse in oil prices.

Here are some of the contrarian scenarios for next year:


China's credit bubble bursts and bad debts provoke a full-blown banking crisis; economic growth - which the government now targets at 7.5 per cent for 2015 - collapses to 2 per cent. Fathom Consulting attaches a 35 per cent probability to this scenario.


The euro zone finally breaks out of its economic torpor thanks to the boost from lower oil prices, a weaker euro, further European Central Bank easing of monetary policy and a strengthening banking system. Growth surges to 2 per cent. JP Morgan reckons this is possible, although its base case forecast is for 1.6 per cent growth, still more optimistic than the 1.1 per cent consensus in a Reuters poll of more than 50 economists.


Morgan Stanley says the yield on 10-year German bonds could jump next year to 1.35 per cent from a record low 0.69 per cent last month. The rationale? Investors put full faith in the ECB's policy easing to generate inflation, pushing up market interest rates.

German bonds have shown how wrong the majority view can be: the consensus forecast a year ago was for yields to reach 2.3 per cent by the end of 2014.


Britons vote next May in parliamentary elections and Prime Minister David Cameron plans a referendum on EU membership if his Conservatives win. Throw in a revival of the Scottish independence question if the Scottish National Party performs strongly, and British political risk could soar.

As yet there has been no discernible impact on markets. But sterling weakened shortly before last September's Scottish independence referendum, which the SNP lost by a far narrower margin than had once seemed likely. If this is any guide, investors may again take fright before the 2015 election. "Stay away from UK assets into the elections," warns Societe General.


The almost unanimous view across financial markets for 2015 is that the dollar will strengthen, with only the magnitude remaining a bone of contention. But if ever there were a "crowded trade", this is it. The dollar has already gained 11 per cent this year, almost all since June, making 2014 its third best year in the last three decades. Time for a breather?