Historically, improvement in US economy has translated to economic growth in rest of the world with a slight lag. However, this time, the major economies like Europe, Japan, China and other emerging markets (EM) are expected to remain weak with low growth owing to various issues. This was because unlike the US, they undertook monetary easing without controlling their fiscal deficit.
For instance, Europe is grappling with the existence of Euro itself and reducing the high fiscal deficit in the unproductive high-cost Southern European economies like Spain, Italy, Greece, etc. The crisis is gradually engulfing even France and other Northern European economies. There are no easy solutions to the crisis as the past 2 years have shown where despite ECB’s best efforts, GDP growth among all member economies have floundered. Only Germany stands apart in European Union with its dominance in manufacture of high-end engineering goods and exports to emerging markets across the world. The unemployment rate has been shot up in recent years as well. Since most of the other developed and emerging market economies are expected to struggle, their currencies will depreciate against USD. Since Germany will struggle due to its focus on EM, EUR will also depreciate against USD.
Japan has been in a deflationary scenario for almost 2 decades and the effects of Abenomics have already reversed their effect to a major extent. Japan has already undertaken a monetary easing similar to that of US. However, it has adopted active JPY depreciation to battle the deflation since it doesn’t have a solid domestic growth story like that of US. The impact of Abenomics is yet to be seen and its effects will be seen in 2015-16 at the earliest.
China wants to grow at its historical growth rate but is now reeling under the adverse effects of past monetary and fiscal stimulus which has led to high borrowing costs in the shadow banking system. Hence, China has no ammunition left for further stimulus. In case China grows at lower growth rate, it will have a negative spillover effect on rest of Asia and commodity dependent economies like Australia, Brazil, etc.