Global Economy Reviews

05.08.2016 18:09 World Economy Review - July 2016

The International Monetary Fund (IMF) cut its global growth forecasts for the next two years, citing uncertainty over Britain`s looming exit from the European Union. The move included a nearly full percentage-point reduction in the UK`s 2017 growth forecast.

Cutting its World Economic Outlook forecasts for the fifth time in 15 months, the IMF said that it now expects global GDP to grow at 3.1 percent in 2016 and at 3.4 percent in 2017 -- down 0.1 percentage point for each year from estimates issued in April.

The Fund said that despite recent improvements in Japan and Europe and a partial recovery in commodity prices, the UK`s Brexit vote had created a "sizeable increase in uncertainty" that would take its toll on investment and market and consumer confidence.

On the day before Britain`s June 23 EU referendum, the IMF was "prepared to upgrade our 2016-17 global growth projections slightly," IMF chief economist Maury Obstfeld said in a statement. "But Brexit has thrown a spanner in the works."

The IMF said that the impact will hit hardest in Britain itself, where the institution cut its 2016 growth forecast to 1.7 percent, down 0.2 percentage points from its April forecast. It cut the 2017 UK forecast more sharply, by 0.9 percentage points, to 1.3 percent.

The IMF lifted its euro zone forecast slightly for 2016, but cut its 2017 outlook by 0.2 percentage point to 1.4 percent for 2017.

It said last week that Brexit would have a "negligible" impact on the United States.

The IMF noted that its latest forecasts were made under relatively benign assumptions of a settlement between the EU and Britain that leads to limited political fallout, avoids a major increase in economic barriers and prompts no major further financial market disruptions.

But the Fund also modeled other scenarios, including a "severe" one in which the divorce negotiations go badly, financial stress intensifies, the UK-EU trading relationship reverts to World Trade Organization rules, and London loses a large portion of its financial services sector to continental Europe.

Under that scenario, Britain would fall into recession and global growth would slow to 2.8 percent in both 2016 and 2017, the IMF said.

A middle scenario labeled "downside" would see tighter financial conditions and lower consumer confidence than the baseline, with the UK losing some of its financial services sector to Europe. It shows global growth at 2.9 percent in 2016 and 3.1 percent in 2017.

Obstfeld said that the financial market recovery following the initial Brexit shock helped persuade the IMF to go with the most benign of the three scenarios.

Responding to the IMF`s report, a UK Treasury spokeswoman said that the Brexit vote marks a "new phase" for Britain`s economy, but the country would remain globally focused.

"Our absolute priority is to send a clear signal to businesses both here and across the world, that we are open for business and determined to keep Britain an attractive destination for investors from overseas," the spokeswoman said in a statement.

The IMF said China`s outlook was largely unchanged, with a slight improvement to 6.6 percent seen in 2016, but still slowing to 6.2 percent in 2017.

Recessions in Brazil and Russia will be less severe than previously forecast this year due partly to some recovery in oil and commodities prices, the IMF said, adding that both countries will return to positive growth in 2017.

The Fund urged policymakers not to accept the tepid growth rates as a "new normal," and said that they should support demand in the near-term and structural reforms to aid medium-term growth.

The IMF said it had been prepared to raise Japan`s 2017 growth outlook by 0.4 percentage points after the delay of a consumption tax hike next spring, but this has been cut in half by the continued rise in the yen`s value.

It now expects 2016 growth of 0.3 percent compared with 0.5 percent previously, while 2017 growth will be barely in positive territory at 0.1 percent.

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06.07.2016 17:58 World Economy Review - June 2016

The World Bank is reducing its forecast for the global economy this year - again. The aid agency predicted that the world economy will expand 2.4 percent this year, down from the 2.9 percent it expected in January and unchanged from a tepid 2015.

“The global economy is fragile,” said World Bank economist Ayhan Kose, who helped produce the forecast. “Growth is weak.”

In the years since the world began recovering from the 2008 financial crisis, the World Bank and the International Monetary Fund have repeatedly proved too optimistic about the world economy and have had to downgrade their previous forecasts.

The World Bank`s latest 2016 forecast is more pessimistic than the IMF`s outlook for 3.2 percent global growth this year, a projection made in April.

Since then, it`s become clearer that low commodity prices continue to vex many developing countries whose economies depend on exports of those commodities. And advanced economies are still struggling to gain momentum as they contend with aging workforces and lackluster productivity growth.

The World Bank expects the U.S. economy to grow 1.9 percent this year, down from 2.4 percent in 2015. The downgrade for the United States reflects a weak first quarter: Growth from January through March reached a negligible 0.8 percent annual rate. U.S. manufacturers have been especially hurt by a strong dollar, which has made their goods more expensive overseas.

The bank expects developing and emerging market economies as a group to grow 3.5 percent this year, down from the 4.1 percent it forecast in January and barely changed from last year`s 3.4 percent.

World Bank economists are drawing a distinction between emerging market countries that export commodities and those that import them.

The exporters, crushed by tumbling prices of oil and other commodities, collectively grew just 0.2 percent last year and are expected to expand 0.4 percent in 2016. The importers, which benefit from lower raw materials prices, are still growing at healthy rates - 5.9 percent last year and a predicted 5.8 percent this year.

Latin America has been particularly hard hit. The World Bank predicts that the region`s economy will shrink 1.3 percent this year after sliding 0.7 percent in 2015. Brazil, mired in political scandal, is expected to suffer a 4 percent economic contraction in 2016 after shrinking 3.8 percent last year.

The 19 countries that use the euro - the Eurozone - will grow 1.6 percent, the same as last year, the World Bank says. Eurozone growth has been constrained by the weakness of European banks, which are still saddled with bad debt and aren`t making many new loans.

Japan will expand 0.5 percent, a bit slower than last year, the World Bank predicts. Prime Minister Shinzo Abe`s aggressive plans to rejuvenate growth - partly through the Bank of Japan`s easy-money policies - have had only mixed results so far.

The World Bank left its forecast for China`s economic growth unchanged at 6.7 percent. The Chinese economy, the world`s second-biggest, has been decelerating for six years as Beijing has sought to move away from dependence on investment in factories and real estate toward slower but steadier growth built on consumer spending.

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08.06.2016 14:13 World Economy Review - May 2016

The World Bank`s 2016 global economic growth predictions estimate a slower rate of increase than what was previously forecast. The bank currently estimates 2016 global growth at approximately 2.9 percent. Combinations of less than anticipated growth in two of the world`s largest economies, China and the U.S., curbed these global growth predictions.

Positive trends in both economies are seen to be present, although such trends may not be enough to trigger consumer sentiment and the confidence associated with widespread economic growth. Lower unemployment and income parity in the U.S. and China, respectively, are leading considerations in estimating baseline trends for future growth.

With regard to emerging markets, South America, sub-Saharan Africa and parts of Asia produce smaller economic impacts on the global economy than do the major national economies. When compared to global gross domestic product (GDP), shifts in overall growth in these regions is negligible.

Turmoil from the European Union`s economic recovery strategy lingers in bond markets as underpricing debt, given that currently added liquidity remains trapped in the market through the eurozone`s quantitative easing programs.

China`s current growth slowed to 7.3 percent, down from the 10.6 percent recorded prior to 2007, a period that saw U.S. growth of 2.5 percent. China`s monetary policy targets a tight control over its domestic money supply. China cut its reserve ratio five times in the most recent fiscal year. Down to 17 percent, the discount rate now stands at 1.5 percent, its lowest since 2008.

Most other central banks are below 1 percent, arguably a unit or more away from traditional risk-averse standards. At 1.5 percent, the Chinese still remain above most of Europe in terms of their easy money policy, which presumably keeps them well outside of a possible liquidity trap. Unknown, however, is whether this will affect future growth.

In U.S. dollars, the yuan has appreciated at or about $33 over the three years that ended in March. Despite its foreign reserve climbing steadily to rest at $431.60 as of March 2016, China`s total loan growth has risen 37 percent since 2006.

What drives demand? Income and expectations. Average Chinese income is significantly less than 20 percent of the U.S. average despite the dramatic rise in that number of people in the same income bracket over the past two decades. Yet Chinese average income quadrupled from 2004 to 2015 to an average of $7,000 U.S. and is expected to climb even higher in the coming decade. What decreases demand? Lower income and negative expectations. Speculators attribute the current slowdown in China`s economy to decreased policy manipulation, a shrinking technology gap and changes in capital and labor productivity.

Reported local government spending in China is restrained. However, globally, government military expenditures place China second only to the United States in that category with total 2015 military expenditures up 11 percent in 2015 as compared to the previous year. Overall military growth predictions for China should keep in mind that the country`s military spending numbers are known to be deflated. On other fronts, China`s government plans to have a manned space station operational by 2020. According to the Council on Foreign Relations, in 2012, China supplied the U.S. with $165 billion (U.S.) in foreign direct investment (FDI).

As predicted by economists, Japan`s decision to increase its sales tax produced negative impacts on GDP growth in 2014. July 2014 saw a -0.2 percent decrease in growth as a result of the tax increase imposed in April that year. Further tax increases scheduled for 2016, ranging from 8 to 10 percent, were postponed until 2017 for fear of eroding economic conditions. The deep plunge in demand and economic growth was minus 1 percent in 2014, though it neared a positive 1 percent in 2015. The World Bank currently estimates 2016 growth at 1.3 percent.

Sustained by external demand, Japan`s anemic GDP growth exhibited a notable decrease in imports as Japanese exports fell by 0.9 percent. Non-residential investment and government spending led growth on the plus side. Overall, however, Trading Economics.com estimates that Japan`s economy contracted as much as 1.1 percent in FY 2015.

The U.S. Federal Reserve`s decision on whether to raise interest rates currently consumes the attention of most economists. As the largest global economy, changes in U.S. monetary policy are watched closely, factoring into various predictions for global growth and worldwide consumer demand.

U.S. Industrial Production (IP) has decreased in all sectors—most notably mining—since March 2015. IP is one of two reports closely monitored by the Federal Reserve because it gauges the relative strength and flexibility of the manufacturing sector. As a leading indicator of business investment spending, it also helps determine estimates of ongoing and future economic vitality.

According to official estimates, U.S. unemployment is currently hovering around 5 percent, as of March 2016, its lowest point since President George W. Bush`s second term, with approximately 8 million unemployed. Hardest hit by the recent recession were African-Americans, who are currently experiencing an elevated rate of unemployment, currently estimated at roughly 9.0 percent. Unofficial Department of Labor estimates of U-6 unemployment among all economic strata puts the number of unemployed, underemployed and uncounted workers at just under 10 percent.

With decreased IP and anemic GDP growth at less than 2.4 percent, however, the U.S. economy may very well be contracting. The upside is that there is no inflation.

According to government estimates and projections, the overall economic trend in the U.S. is seen as incrementally positive and stable, although still not as strong or robust as it was before the Great Recession. Economic predictions in an election remain tentative, at least in part because the November elections carry potentially far-reaching implications regarding future economic and consumer expectations.

Until this month at least, any interest rate increase by the Federal Reserve was judged unlikely to occur until after Q4 2016, giving the Fed time to consider holiday shopping trends and fiscal policy shifts from state and federal budgets. Speculation has recently shifted raising expectations of a Q2 or Q3 interest rate increase. Such expectations will likely lead to a continuing rise in bond prices and a decrease in yields.

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08.05.2016 12:51 World Economy Review - April 2016

Negative interest rates are the right policy for the world economy, the International Monetary Fund (IMF) has said, though it has warned central bankers and policymakers to stay vigilant about the potential for the “unprecedented” policy to cause significant side effects.

A study published ahead of the IMF`s spring meeting in Washington DC alongside the World Bank, has concluded that on balance, negative interest rates “help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability.”

“Still, there are limits on how far and for how long negative policy rates can go … both in terms of the extent to which central banks can set rates at negative levels and the length of time they can remain negative,” Jose Vinals, Simon Gray and Kelly Eckhold from the IMF said.

Restrictions on the use of negative interest rates - currently being used by six central banks - centered not only on a de facto `floor` for how low they could go before people started hoarding cash, but also on the impact negative rates would have on savers, investors and pensioners along with what the IMF called “significant political economy and social limits”.

“The public may feel that they are being `taxed` if and when deposit rates increasingly turn negative,” researchers warned, as they estimated that the effective basement for negative rates could be anywhere between minus 0.75 - minus two per cent, depending on the country.

“There may also be excessive risk-taking. As banks margins are squeezed, they may start lending to riskier borrowers to maintain their profit levels … Weak loans could become harder to detect, and vital corporate restructuring could be delayed.”

Perhaps most worryingly, the IMF also said that “negative interest rates may induce boom and bust cycles in asset prices.”

“These potential risks require close monitoring and supervisory scrutiny,” the Fund concluded, but confirmed that it “support[s] the introduction of negative policy rates … given the significant risks we see to the outlook for growth and inflation.”

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06.04.2016 14:00 World Economy Review - March 2016

There is a near one in three chance the world economy will slip back in to recession this year as low oil prices and extraordinary monetary stimulus have a dwindling impact on global growth, Morgan Stanley has warned.

The US investment bank said a "low growth environment" had made the world vulnerable to a litany of shocks, including fears that central banks have lost control over domestic financial conditions, while rising political risks from Europe to the Middle East threaten to overwhelm governments.

Global growth is forecast to hit just 3pc this year, down from Morgan Stanley`s earlier estimate of 3.3pc, with advanced world growth falling to 1.5pc.

Japan received the biggest single downgrade of any country, with GDP slashed in half to just 0.6pc from 1.2pc.

Global GDP fell to 2.3pc in the last quarter of 2015 - below the 2.5pc threshold, which marks a recession - forcing Morgan Stanley to raise their global recession risk probability from 20pc to 30pc.

"The renewed slowdown in global growth late last year has pushed the risk of a recession higher," said Elga Bartsch at Morgan Stanley.

Despite a record crash in global oil prices over the last 20 months - widely seen as a tax cut for the world`s oil consumers - the positive effects of lower oil prices were not as pronounced as previous eras, said the investment bank.

It noted that fuel high taxation in many countries meant many consumers were failing to see the full benefits at the pumps, while investment was collapsing in major producer countries such as the US.

Contrary to many expectations, consumers in the advanced world have also failed to spend the windfall from lower prices, opting instead to pay down debts and save. Lower consumption levels have thus weighed down on economic activity.

"The global economy does not seem to be as responsive [to lower oil prices] as it has been in the past", said Ms Bartsch.

Their bearish outlook was also driven by the inability of central banks "to pull the global economy out of its low-growth, lowflation rut".

The European Central Bank redoubled its efforts to revive growth and inflation in the Eurozone last week, announcing its first foray into corporate bond buying, slashing interest rates, and providing a series of cheap loans to commercial banks.

Eight years after the financial crisis, the size of the ECB`s balance sheet will finally overtake that of the US Federal Reserve and Bank of England at more than 20pc of the bloc`s GDP, according to JP Morgan.

However, analysts noted that investors were no longer in thrall to central bank action. The euro strengthened and equities fell in the immediate aftermath of the unexpectedly large stimulus package.

Faltering market confidence is worrying for policymakers as it "could undermine the effectiveness of monetary policy" much of which is aimed at weakening exchange rates to boost inflation.

"Repeated easing initiatives seem to have a diminishing effect on financial markets, portfolio reallocation and economic sentiment", said Ms Bartsch.

Tighter financial conditions and moderate growth has forced the investment bank to slash its initial expectation of three interest rate hikes from the Federal Reserve this year, to just one. US growth is expected to slow to 1.6pc this year, down from 1.8pc.

Morgan Stanley also expect the ECB to end the year with a -0.5pc deposit rate and the Bank of Japan to carry out another 20 basis point cut to its already negative rate by July.

"The global economy is still stuck in a low-growth environment characterized by weak demand dynamics, subdued investment spending, low inflation rates, elevated unemployment, as well as modest wage and productivity gains. This leaves us vulnerable to shocks," said Morgan Stanley.

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