Global Economy Reviews
07.03.2016 00:30 World Economy Review - February 2016
Paris-based Organization for Economic Co-operation and Development (OECD), a think tank funded by wealthy countries, cut its 2016 global growth forecast to 3 per cent in its interim economic outlook, from the 3.3 percent it forecast in November.
The OECD poured cold water on any lingering hopes of a pick-up in global economic growth this year, slashing its forecasts for the United States, Europe and Brazil and urging world leaders to act collectively to strengthen demand.
The OECD forecast would mean global growth this year would be no higher than in 2015, itself the slowest pace in the past five years.
Trade, investment and wage growth remained too weak, the OECD said, urging world leaders to deploy all policy levers to stimulate growth urgently.
"Monetary policy cannot work alone," it said. "A stronger collective policy response is needed to strengthen demand," it added, urging countries with room for fiscal expansion to raise public investment in infrastructure projects.
The US and Germany suffered the biggest downgrades among major developed economies, with the OECD slashing its 2016 forecast by half a percentage point for both countries to 2.0 percent and 1.3 percent respectively.
The OECD now expects US and euro zone growth to slow from the previous year, to 1.4 per cent for the latter, and to pick up only marginally in 2017 to 2.2 percent and 1.7 percent respectively.
The OECD left its forecasts for Chinese growth unchanged for the next two years, but it still expects growth to slow to 6.5 percent in 2016 and 6.2 percent in 2017.
In the euro zone, the positive effect of lower oil prices on activity has been less than expected, the OECD said, while very low interest rates and a weaker euro had yet to lead to sustained stronger investment.
Across the Atlantic, US growth slowed in the second half of last year under the weight of a stronger dollar, which dragged on exports, and the impact of lower oil prices on the country`s large oil and gas industry.
Among the largest emerging economies, Brazil was seen as a major victims of falling commodity prices, with a recession expected to be deeper than feared at -4.0 percent this year.
In a rare bright spot, the OECD raised its 2016 forecast for India`s growth by 0.1 percentage points to 7.4 percent.
05.02.2016 19:10 World Economy Review - January 2016
The International Monetary Fund lowered its forecast of global economic growth over the next two years amid the deepening slowdown in emerging markets and a continued slump in oil prices.
The IMF now projects the world economy will grow 3.4 percent this year and 3.6 percent in 2017. That pace would be faster than last year, but the projections are 0.2 percentage points lower than the IMF estimated in the fall — a sign that the global recovery is still struggling to build momentum.
“Growth expectations seem to fall consistently,” said Maury Obstfeld, economic counsellor at the IMF. “I think the year coming is going to be a year of great challenges.”
China officially announced that its growth rate had slowed to 6.9 percent in 2015, the slowest pace in a quarter century. The IMF forecast that growth in China will further slow to 6.3 percent this year and fall to 6 percent in 2017 - below Beijing`s official target for the pace of expansion. Many analysts are skeptical of the country`s estimates of growth, and some fear its economy is in much worse shape than officials are willing to acknowledge.
China`s boom had been built on exporting its low-priced goods around the world, driving domestic investment in factories, equipment and infrastructure. China`s seemingly insatiable demand for raw materials also helped buoy resource-rich countries such as Brazil and Zambia.
Now the tide is turning. Chinese exports face stiff price competition from other Asian countries at the same time that worldwide demand is sagging. Beijing is attempting to shift the country`s economic engine from manufacturing and trade to consumer spending, but the adjustment is slow and painful. And lately, investors have begun to question whether officials are up to the challenge.
“We don`t see a big change in fundamentals in China … but the markets are certainly very spooked by small events that they find very hard to interpret,” Obstfeld said.
The slowdown in China is spilling over to several key emerging markets, which had ridden Beijing`s coattails to prosperity during the boom. The IMF pointed to political upheaval and a sharper contraction than expected in Brazil as a key factor behind the downgraded global forecast.
Meanwhile, the IMF said it expects oil prices to remain “low for long.” The price of Brent crude oil on international markets recently fell below $30 a barrel, a psychologically important benchmark. Many analysts also expect Iran to ramp up production after U.S. sanctions were lifted this weekend, adding to the global supply glut and holding back prices.
Emerging markets had supported much of the growth in the world economy following the 2008 financial crisis. But as they slow down, countries such as the United States and those in Europe lack the momentum to pick up the slack. The IMF estimates that advanced economies will grow a modest 2.1 percent this year, compared to the 4.3 percent rate of growth in emerging markets.
The IMF also reduced its estimate for U.S. growth, projecting it will plateau over the next two years at 2.6 percent. The Federal Reserve recently began withdrawing its support for America`s economy by raising interest rates. The move was intended to signal its confidence in the resilience of the recovery, but the IMF suggested the economy may not be as robust as hoped. “We`re not as optimistic about a pickup in U.S. growth,” Obstfeld said.
09.01.2016 12:23 World Economy Review - December 2015
A sharp slowdown in the world`s second largest economy China would hit global growth hard, according to a report by Fitch ratings agency, which warned of "significant knock-on effects" for the rest of the world.
In its report published in December, Fitch warned that a sharp slowdown in China`s GDP growth rate to 2.3 percent during 2016-2018 "would disrupt global trade and hinder growth, with significant knock-on effects for emerging markets and global corporates. In turn, this would keep short-term interest rates and commodity prices lower for longer."
Global GDP growth is currently expected to be 3.1 percent in 2017, according to Oxford Economics` global economic model which was used by Fitch to frame its "shock" China scenario. But if a slowdown of such a magnitude materialized in China, Fitch said global GDP growth would slow to 1.8 percent in 2017.
As a result, any rise in U.S. and euro zone short-term interest rates would be postponed, and oil prices would remain under pressure, Fitch said.
"Lower-for-longer in terms of growth, interest rates and commodity prices, could be the defining mantra of this decade for the major advanced economies if a Chinese shock scenario materializes," Bill Warlick, senior director of Macro Credit Research at Fitch, noted in the study.
While Fitch emphasized that this hypothetical scenario did not reflect its current expectations for China`s growth, it was "designed to test credit connections between China and the rest of the world."
In terms of these "credit connections", a China slowdown would "impair" the credit profiles of many companies globally, particularly commodity-dependent ones in oil and gas, steel, and mining, Fitch said.
"Shipping companies would also suffer, as commodities account for a significant portion of freight volume. The global technology, heavy manufacturing and automotive sectors would also feel increased credit pressure due to a slowdown in Chinese demand," the agency warned.
Andrew Steel, managing director of Asia-Pacific Corporates Ratings at Fitch, said commodity companies already under pressure from slowing China demand and falling prices, would be pressured further.
"Knock-on effects like anaemic or slowing global consumer demand and commodity supply gluts would persist or worsen," Steel predicted.
Within Fitch`s rated portfolio, 25 percent of oil and gas companies and 52 percent of other commodities companies are already sub-investment grade. If the slowdown scenario materialized, it could create ripple effects through the high-yield bond market, the agency said.
China`s growth rate is expected to be 6.8 percent in 2015, according to the International Monetary Fund`s latest "World Economic Outlook" report published in October.
Although robust, that growth rate has been slowing down year on year, reflecting slower economic conditions in the rest of the world. In 2013, China`s economy grew 7.7 percent but in 2014 China`s GDP expanded by 7.3 percent. The IMF predicted further slowing growth in 2016, of 6.3 percent.
Fitch`s Warlick said markets were watching China for signs of the slowdown accelerating. "China`s rapid rise as a global economic power, and its deepening ties to the rest of the world, have forced global credit investors to weigh carefully the potential impact of a sharp China slowdown," he said in the report.
"After tracing China`s financial and trade links around the world, it`s clear that a greater-than-expected deceleration in Chinese economic activity would have far-reaching implications for global growth, corporate credit quality and monetary policy."
08.12.2015 00:56 World Economy Review - November 2015
The global economy as we know it in terms of predictability and trajectory is no more. Events have changed dramatically, so much so, engines of growth are being replaced while preparing for a new future.
The end to a decade-long commodity boom has caused economic charts to be redrawn, peppered with reduced expectations.
Cuts to global growth by the International Monetary Fund (IMF) and the World Bank recently assumed added gravity following downgrades by the Organization for Economic Cooperation and Development (OECD) and revised trade prospects by container vessel operator AP Moeller-Maersk A/S.
Year 2016 could see a slew of “half profits, slower pace, drastic constraints to new business, overcapacity and commodity-currency correlations deepening”.
The prospect of worldwide trade growth slipping from 3.4% (in 2014) to 2%, prompted the Paris-based OECD to say: “This is deeply concerning.
Robust trade and global growth go hand in hand.” Early last month, Maersk, a global indicator of trade volume, said third-quarter (3Q) net profits had almost halved to US$778 million, from US$1.5 billion a year ago.
Areas of real concern? The coming year is to see rising inventories of vessels, crude oil, metals in general, imports and exports waning (China an important case in point), unsettling terms of trade, stock, currency depreciation even devaluation.
And, with overcapacity far outstripping demand, only something short of a timely turnaround in current trends can avert a deeper plunge.
Deutsche Bank (New York) threw some cold water on prevailing negativity: “Financial markets continue to be dominated by market speculation, whether it is about Fed rates or health of the global economy. Fed focus on external risks from emerging markets (EMs) has stoked rising concerns, and despite revisions to growth, we don`t share the widespread pessimism.”
In a note to The Malaysian Reserve (TMR), it offered three reasons why pessimism was “overdone”.
Domestic demand fundamentals remain solid in US and Europe, and data from China are far from suggesting a sharp slowdown — leaving the three world`s leading economies on sound footing.
When CEO of AP MoellerMaersk, Nils Smedegaard Andersen said early this month the world`s economy was growing at a slower pace than claimed by the IMF and other forecasters, he was seeing an emerging world where the resources economy is rapidly falling behind developed markets that are relying on their greatest strengths — services and technology.
Shipments, according to Asia-centric HSBC continue to be “soggy” — the reason being that Asia`s trade slowdown reflects not just structural but also cyclical influences.
Forecasters see such factors stemming from exclusively weak demand from mostly advanced economies (AE), in spite of the hype about US economic growth and stock market frenzy that are raising hopes the Federal Reserves (Fed) will raise interest rates soon.
The investment bank in a note to TMR explains what is happening to EM trade.
“Shipments in value terms (measured in US dollars) have begun to significantly contract in 2015. Even in volume terms, exports are falling.”
This, it added, is highly unusual, being only the fourth time in over 25 years that shipment volumes are contracting. (The other episodes are the Asian financial crisis, the tech slump and the Great Recession.)
HSBC added: “The good news is that inflation in EMs is unlikely to constrain central banks. More fiscal spending would now help, given financial risks are mostly manageable.”
Money Value, Markets to Change For the investment market, 2015 has been mostly a year of weary “anticipation” of a Fed rate hike triggering carry trade.
The Oct policy-setting meeting has sent the strongest signal so far that an uptick is on the cards, with many researchers, analysts and traders concurring.
Central banks in AEs are expected to continue struggling with weak demand and inflation in the coming year as EMs slow down.
The second-largest central bank, European Central Bank (ECB), is going for a substantial stimulus program.
Capital movement: The massive outflow of some US$500 billion from China (since July, 2001) and subsequent departure of another half a trillion dollars from other EMs have, since mid-2014, become a drag on currency value, posing renewed threats to stability.
Global investment bank Credit Suisse (New York) in a separate note to TMR predicts 2016 could likely “prove to be a watershed in global economic history”. It blames the prospect squarely on the Fed`s rate move.
“This attempt at tightening will occur in a global economy experiencing historically large divergences among the major players, as structural issues intersect with normal cyclical dynamics,” the bank said.
Outflow of liquidity from EMs that had benefitted from the eight-year-long Fed stimulus largesse could produce a “high-impact event,” it added.
The Swiss bank said a more likely risk scenario involves a drift higher in US core inflation that triggers higher interest rates and further tighter financial conditions worldwide. Simplistically, this means rush by carry trade players whose transfer of funds will further depress commodity-linked currencies.
Given the weaker return on investment, EMs are not expected to raise large capital to revitalize their economies like AEs, but as Deutsche Bank points out in an Asia year-end review: “While weak growth is a concern for EMs next year, we don`t expect systemic crises and no sharp slowdown in China.”
Events in the world`s most important trading markets are unfolding in a way nobody could have predicted this year.
For the moment, money value (consolidation of greenback), and the ECB`s readiness to pump billions into the Eurozone are mostly on track.
However, the economic news last month about the second and third-largest economies in the world remain dismal. While China continues to hit new gross domestic product lows, Japan is in technical recession.
08.11.2015 15:15 World Economy Review - October 2015
The International Monetary Fund (IMF) is warning that the weak recovery in the west risks turning into near stagnation after cutting its global economic growth forecast for the fourth successive year.
In its half-yearly update on the health of the world economy, the Washington-based fund predicted expansion of 3.1% in 2015, 0.2 points lower than it was expecting three months ago and the weakest performance since the trough of the downturn in 2009.
“Six years after the world economy emerged from its broadest and deepest postwar recession, a return to robust and synchronised global expansion remains elusive,” said Maurice Obstfeld, the IMF`s economic counsellor.
“Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth rates marginally, but nearly across the board. Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago.”
The IMF`s world economic outlook (WEO) predicted the US would have the strongest growth of the leading G7 industrial nations in both 2015 and 2016, at 2.6% and 2.8%, respectively. Britain is expected to be the second-fastest growing G7 nation, although output growth is predicted to slow from 2.5% to 2.2%.
None of the other G7 countries – Germany, France, Italy, Japan and Canada – is predicted to post growth as high as 2% in either 2015 or 2016.
“Recovery is most advanced in the US and the UK, where monetary policy looks likely to tighten soon, but is more tentative in the euro area and Japan,” Obstfeld said.
The WEO accepted that the IMF has been consistently over-optimistic in its predictions for the global economy. “Growth has fallen short of forecasts over the past four years,” it said, noting that on average the IMF had over-estimated expansion by one percentage point a year.
“The main medium-term risk for advanced economies is a further decline of already-low growth into near stagnation, particularly if global demand falters further as prospects weaken for emerging market and developing economies,” the WEO said. “In this context, persistently below-target inflation could become more entrenched.”
Growth in the advanced countries of the west is forecast to pick up slightly, from 1.8% in 2014 to 2% in 2015. But this has been more than offset by a slowdown in the rest of the world, where growth is expected to fall from 4.6% to 4%. “Global growth remains moderate – and once again more so than predicted a few months ago.”
The IMF said the stronger advanced economies – the US and the UK – were likely to be the first to raise interest rates, with the first increase predicted in late 2015 for the US and in 2016 for the UK.
“The process of normalizing monetary policy in the United States and the United Kingdom is assumed to proceed smoothly, without large and protracted increases in financial market volatility or sharp movements in long-term interest rates.”
Following the share price falls in financial markets in August, the IMF said it was important that emerging market countries were prepared for a rise in US borrowing costs. Leading western countries that still had spare capacity following the recession of 2008-09 should continue to provide stimulus, through a combination of ultra-low interest rates, the money creation process known as quantitative easing, and public spending on capital projects. It said that “the case for infrastructure investment seems compelling at a time of very low long-term interest rates. Investment is one way to enhance potential growth, but targeted structural reforms can also play an important positive role.”
Emerging market economies such as China were the main source of growth in the immediate aftermath of the 2008-09 slump, but the IMF said the outlook was weakening, with growth projected to decline from 4.6% in 2014 to 4% in 2015 – the fifth annual decline in a row. China`s growth is expected to match earlier IMF forecasts but recessions in Brazil and Russia are now on course to be worse than previously estimated.
The WEO listed a number of potential risks – financial market turmoil; lower potential output; a hard landing in China; the impact of lower commodity prices on commodity-exporting nations; a strengthening of the US dollar; geo-political unrest; and secular stagnation. “The distribution of risks to global growth remains tilted to the downside,” it said.
Oil prices are projected to increase gradually, from an average of $52 a barrel in 2015 to about $55 a barrel in 2017. In contrast, non-fuel commodity prices are expected to stabilise at lower levels after recent declines in both food and metal prices.” Lower oil prices are expected to result in inflation in advanced countries declining from 1.4% in 2014 to 0.3% in 2015.