By Daniel Hunter

Political turmoil in Greece will dominate the minds of business leaders as 2015 begins, the UK’s leading organisation for company directors has predicted.

The possible election of Syriza, a party vowing to renegotiate the terms of Greece’s international bailout, is alarming politicians across the Eurozone, who already face a range of serious economic challenges. James Sproule, Chief Economist at the Institute Of Directors, looks ahead at likely developments in the coming year:

1. “Europe will avoid deflation, but only technically. Deflation can be triggered by a number of things (some of which are positive, such as technological change which dramatically raises productivity).

"However the deflation Europe is grappling is the consequence of deteriorating consumer confidence, not a failure of monetary policy. The means that people are not deferring purchases to take advantage of price falls; they are avoiding purchase as they remain very cautious about their future prospects. As Europe is finding out, it is very difficult to turn around a moribund consumer, particularly with more of the same politics. The long term danger is that deflation leads to success for fringe political parties who seem to offer another way forward. The first test will be the Greek election on 25 January."

2. “Eurozone quantitative easing is coming. The European Union is likely to undertake a form of Quantitative Easing for the Eurozone, but it is unlikely to have the desired results. The scale of QE in the US is $4,488 billion (ie trillion) (25.57% of GDP), and in the UK it is £374.911 billion (21.09% of GDP), the EU is likely to contemplate a fund of potentially €3 trillion, (22.46% of GDP), similar in size to the US and UK efforts.

"However, the Eurozone funds will almost certainly be an amalgam of existing funds being double counted in order to give the impression of size without the actual spending of money. Secondly, there is a better than even chance that any QE flows will be directed at politically expedient infrastructure projects, where the economic multiplier effects of spending are likely to be muted and the longer term ability of such projects to generate their build costs has to be questioned. Still, in the short term QE is likely to be a mild stimulus."

3. “UK wages are set to rise in 2015. The rises are unlikely to be spectacular, generally around 2%-3%, and broadly in line with corporate performance. This means pay rises have the advantage of being in line with productivity and are therefore much more sustainable than rises simply tied to inflation. The only caution here comes from the recent European court ruling opening up employers to back-dated holiday pay claims. Meeting these claims may preclude pay rises for parts of the workforce."

4. “UK interest rates remain at historic lows. UK Monetary Policy will remain ultra-accommodative, at 0.5%, for at least the first half of the year. That such rates remain too low for the long term health of the UK economy is going to be increasingly obvious, (the IoD advocated tightening to start in the summer of 2014) but for 2015 the perceived dangers and uncertainties (not least the general election) will outweigh the need to dissuade consumers and corporates from again taking on levels of debt which might prove problematic were interest rates to rise even modestly."

5. “UK infrastructure — A change in government makes the completion of the high speed rail line from London to Birmingham less certain. The project currently enjoys cross-party support, but the large cost and lengthy timeline may make an incoming government think again. A definitive decision on a new airport for the South East remains highly fraught and a weak minority government may find it difficult to act.”

Join us on
Follow @freshbusiness