Global Economy Reviews

07.10.2015 10:48 World Economy Review - September 2015

A marked slowdown in big emerging market countries will cut global growth to its lowest level since the deep recession of 2009, the head of the International Monetary Fund has warned.

Christine Lagarde, the IMF`s managing director, said forecasts to be published by her organisation next week would show activity expanded by less than the 3.4% recorded in 2014 – the joint weakest since the world economy came to a standstill six years ago.

Speaking in Washington, Lagarde said “global growth will likely be weaker this year than last, with only a modest acceleration expected in 2016”.

Lagarde said she was “concerned about the state of global affairs”, highlighting the refugee crisis in Europe, the prospect of 2015 being the hottest year on record and the state of the global economy.

“The prospect of rising interest rates in the United States and China`s slowdown are contributing to uncertainty and higher market volatility. There has been a sharp deceleration in the growth of global trade,” she said. “And the rapid drop in commodity prices is posing problems for resource-based economies.”

The good news had been the modest pick-up seen in developed countries, Lagarde said, but this was offset by the fifth year of declining growth rates in the emerging world.

“India remains a bright spot. China is slowing down as it rebalances away from export-led growth. Countries such as Russia and Brazil are facing serious economic difficulties. Growth in Latin American countries, in general, continues to slow sharply.”

Lagarde said financial stability had not yet been assured despite progress in recent years to make the system safer. “If we put all this together, we see global growth that is disappointing and uneven,” she said. “In addition, medium-term growth prospects have become weaker. The `new mediocre` of which I warned exactly a year ago – the risk of low growth for a long time – looms closer.

“Why? Because potential growth is being held back by low productivity, population aging, and the legacies of the global financial crisis. High debt, low investment, and weak banks continue to burden some advanced economies, especially in Europe; and many emerging economies continue to face adjustments after their post-crisis credit and investment boom.”

Lagarde warned that the slowdown in China would have knock-on effects on countries that rely heavily on Chinese demand for their raw materials. She said there was a possibility of a prolonged period of low commodity prices, particularly in the large commodity exporters.

Calling for a “policy upgrade” to meet the challenges, the IMF managing director said most advanced economies, “except the United States and possibly the UK”, would need to keep providing economic stimulus at its current rate.

She urged the eurozone to tackle non-performing loans worth about ˆ900bn. “This is one of the major unresolved legacies of the financial crisis. By removing the NPL build-up, banks would be able to increase the supply of credit to companies and households. It would enhance the potency of monetary accommodation, improve the outlook, and bolster market confidence.”

Policymakers in emerging economies should better monitor the foreign currency exposure of their major companies and ensure the resilience of their banks following a build-up in corporate leverage and foreign debt.

“At the global level, there is a pressing need to complete and implement the regulatory reform agenda – with a special focus on improving the transparency and oversight of non-banks, or shadow banks. And we still have another major upgrade ahead of us – the resolution framework for systemic, globally active financial institutions remains inadequate.”

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10.09.2015 00:17 World Economy Review - August 2015

The global economy is on course for muted growth this year and next as it faces risks from a slowdown in China, the prospect of higher interest rates in the US and the lingering threat of a Greek exit from the euro, according to the latest forecasts from Moody`s.

Outlining the list of potential shocks that could knock even modest expansion off course, the credit rating agency said it did not expect the world`s leading economies to shake off the legacy of the financial crisis and return to their former growth averages for the next five years.

Moody`s forecasts GDP growth for the G20 to slow to 2.7% this year, down from 2.9% in 2014. The agency is expecting only a slight pickup to 3% growth in 2016, according to its latest quarterly global outlook, which feeds into its ratings on countries` sovereign debts.

“The recovery in the US and, to a lesser extent, the euro area and Japan, will be offset by the ongoing slowdown in China, low or negative growth in Latin America and only a gradual Russian recovery from its recession this year,” said the report`s author, Marie Diron.

“A sharp or long-lasting correction in asset prices in China is one of the risk factors which could result in lower G20 growth than in our baseline forecasts.”

Moody`s said UK growth appeared “robust and broad-based” although it forecast a slowing pace from 2.7% expansion this year to 2.4% in 2016. It said the Bank of England may starting raising interest rates gradually from early next year, as long as a recent pickup in wage growth is maintained. The latest official figures, however, showed UK earnings growth either stalled or fell, depending on the measure used.

The agency used its quarterly update to revise down its oil price forecasts following the sharp falls in recent months and continuing signs that supply continues to outpace demand. Moody`s now expects Brent crude to average $57 (£37) a barrel in 2016, only a little higher than the 2015 average of $55. The price of the North Sea benchmark has more than halved from its peak price of $115 a barrel last summer, trading at $49 on Monday.

Moody`s warning over threats to the outlook from China follows sharp falls on the country`s stock markets last month as officials in Beijing brought in emergency measures to stabilise prices and shore up confidence in the world`s second biggest economy.

China`s surprise currency devaluation last week only served to heighten fears about the state of its economy and the potential impact on the rest of the world. In the biggest one-off devaluation of its currency in two decades the country`s central bank allowed the yuan, also called the renminbi, to weaken by nearly 2% in a day. That was followed by two successive days of further markdowns in the value of the currency.

“The recent depreciation of the renminbi has added concerns about what it may portend for China`s economic growth,” said Diron.

Moody`s forecasts that the official measure of Chinese growth will slow from 7.4% last year to 6.8% this year and 6.5% in 2016, falling towards 6% in subsequent years.

The ratings agency also highlighted risks to the global economy from “a disorderly response” to the anticipated rise in US interest rates.

“The Federal Reserve has stated its intention to raise interest rates from later this year. However, future prices currently imply an expectation that rate increases may start later and proceed at a slower pace than implied by its open market committee`s projections. This gap presents a risk,” said Diron.

The US central bank has paved the way for its first increase in the cost of borrowing in nine years to come as soon as next month. That prospect has fanned fears of renewed volatility in emerging economies` currency, bond, and stock markets as money floods out of them. If a rate rise does cause a shock in financial markets, Moody`s said Turkey and South Africa are among the more vulnerable countries.

In the eurozone the threat of Greece leaving the single currency has receded but not gone away, the ratings agency warned. Although Athens has clinched a new ˆ86bn (£60bn) bailout package, Moody`s has forecast a “sharp recession” in Greece, as “capital controls, heightened risk of exit from the euro area in June and July and now lack of visibility about the policy and economic environment put spending on hold”.

For the eurozone as a whole, Moody`s forecast economic growth to rise from 0.9% last year to about 1.5% this year and next, helped by lower oil prices and a weaker euro. But there was as yet no evidence that structural reforms had significantly lifted the region`s growth potential, Diron said in her report.

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03.08.2015 12:41 World Economy Review - July 2015

The International Monetary Fund trimmed the forecast for global economic growth this year to 3.3 percent, mainly due to unexpected output contraction in North America.

In the update to its World Economic Outlook, the IMF expected the global economy to expand at a slower rate than it did in April, dropping from 3.5 percent to 3.3 percent.

One of the unexpected factors is lower growth rate of the U.S. economy in the first quarter due to bad weather, a strong dollar and slowdown at West Coast ports.

"It was an accident," Olivier Blanchard, the IMF`s chief economist, said in a press conference. "In short, the fundamentals of the U.S. economy are very strong and the recovery is very much in trend."

Drivers for acceleration in consumption and investment in the United States -- Wage growth, labor market conditions, easy financial conditions, lower fuel prices and a strengthening housing market -- "remain intact," the IMF said in the report.

Despite Greece`s debt crisis and recent volatility of the Chinese stock market, the IMF`s expected 3.8 percent growth for 2016 remains unchanged.

"Greece`s economy only represents less than 2 percent of the Eurozone GDP," Blanchard said. "Of course we continue to hope and we are working on an agreement, which would allow Greece to stay in the Eurozone."

"There is little question that Greece is suffering and may suffer even more under the scenario of a disorderly exit from the Eurozone. But the effects on the rest of the world economy are likely to be limited," Blanchard said.

According to the IMF`s update, positive and negative dynamics outside North America were roughly offsetting. Growth in emerging market and developing economies weakened as expected, while advanced economies are expected to expand 2.1 percent in 2015. The eurozone in particular is doing better, according to Blanchard.

The stock market in China played a smaller role, Blanchard said. "It might have some small impacts on consumption spending, but we don`t see it as a macroeconomic issue."

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06.07.2015 14:39 World Economy Review - June 2015

The World Bank downgraded its outlook for global economic growth this year amid a broad-based slowdown in emerging markets and softer output in the U.S.

The development institution said that it now expects the world economy to grow by 2.8%, 0.2 percentage point slower than it estimated in January. “Global growth has yet again disappointed,” said World Bank Chief Economist Kaushik Basu.

Sharp contractions in Brazil and Russia, alongside weaker growth in Turkey, Indonesia and scores of other developing economies are offsetting healthier growth in Europe and Japan, the bank said in its Global Economic Prospects report.

The bank expects global economic growth in 2016 to accelerate to 3.3%, barring trouble in emerging markets as the U.S. Federal Reserve moves toward raising rates. The forecast also assumes recoveries in the eurozone and Japan take hold.

Although the U.S. economy is gathering steam, a brutal winter sapped output in the first quarter and prompted the bank to downgrade prospects for this year by 0.5 percentage point to 2.7%.

A host of challenges are weighing on growth in many of the world`s largest emerging-market economies, countries that helped drive the global recovery in the wake of the financial crisis.

“There is a structural slowdown under way,” said Ayhan Kose, the lead author of the report. “Increasingly, they have difficult growth prospects going forward.”

Many of those economies are reaching the limits of their capacity to grow without major policy overhauls that would open up markets, improve the business environment and increase productivity. Trillions of dollars are needed to expand the arteries of economic growth: roads, railways, ports and other infrastructure.

These emerging-market economies also relied on international sales to power growth over the past decade. But now those export-reliant developing countries are struggling to cope with weak demand across the globe as rich nations continue to struggle to recover from the ravages of the financial crisis.

China, the world`s No. 2 economy and a primary export market for much of the world, is slowing after two decades of breakneck growth as a faster clip than expected. Commodity prices have plunged in the past year amid anemic consumption and resource oversupply.

Adding to their economic headaches, emerging markets are facing dangerous mix of headwinds, having borrowed heavily to finance their decadelong expansions.

Borrowing costs are expected to rise as the Fed prepares to raise interest rates for the first time in nearly a decade. That prospect has also sparked a strong dollar rally, tightening the squeeze on developing-country governments and corporations that borrowed dollars but whose income is denominated in local currency. Investors are increasingly questioning their ability to pay for ballooning obligations amid slowing growth.

The bank`s forecast for a pickup in global growth to 3.3% next year assumes that there is no repeat of the type of volatility that struck emerging markets in mid-2013. Then, former Fed chief Ben Bernanke set off the so-called taper tantrum that triggered emerging-market bond, equity and currency selloffs when he signaled a pullback in the central bank`s stimulus.

But the World Bank said the Fed`s liftoff and long-term tightening cycle combined with domestic uncertainties could fuel major swings in financial markets, capital outflows and contagion throughout emerging economies.

“Our baseline is that it`s going to be smooth sailing,” said Mr. Kose in an interview. “But it still is a realistic concern and with all of these combined, the question is: `Is there a perfect storm outcome?` ”

A pickup in growth next year also assumes that recoveries in Europe and Japan prove durable, a prospect that is still questionable, he said.

Those risks are why governments across the globe are the reason World Bank economists are redoubling their calls for economic overhauls.

“We often repeat that countries must complete `structural reforms` again and again,” Mr. Kose said. “But in the context of Fed tightening, these reforms are critical.”

Investors are growing increasingly wary. The Institute of International Finance—an industry group representing around 500 of the world`s largest banks, insurance firms, hedge funds and other financial institutions—forecasts capital flows into emerging markets will fall to their lowest level this year since the financial crisis.

Falling oil prices and sanctions against Russia for its Ukraine interventions have forced the country into a deep recession. Brazil, where a corruption scandal is reaching the highest levels of the government, is contracting as commodity prices fall and the country struggles rekindle growth prospects. Turkey`s recent elections, instead of cementing the ruling party`s power, has cast a cloud over the country`s political fate and is fueling investor worries that the government won`t enact much-needed economic overhauls.

Such structural reforms - such as opening up long-closed sectors, overhauling outdated or overly burdensome regulations and other policies that help markets work more efficiently - are often painful and politically controversial in the short term. The outcomes often don`t bear fruit for years.

But in the context of all the challenges facing those economies and their need for investment, “there is a very valuable signaling effect associated with those reforms during this transition period of lower commodity prices and higher interest rates,” Mr. Kose said.

India is one example. The government has promised, and enacted, a series of policies that have galvanized investor confidence, including trimming bureaucratic hurdles, slashing fuel subsidies and allowing more foreign investment in some industries.

Although many investors say that work is yet unfinished, the country has now surpassed China as the world`s fastest-growing large emerging market, and economists, including the World Bank, are raising forecasts for India`s growth.

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07.06.2015 19:15 World Economy Review - May 2015

The world economy continues to heal at a disappointingly slow pace, the Organization for Economic Cooperation and Development said on Wednesday, but it predicted that growth should return to a healthier rate close to its long-term goal by the end of 2016.

“Global growth is improving, but it`s not good enough,” Catherine L. Mann, the organization`s chief economist, said in a conference call held before the release of the forecast by the O.E.C.D., the research and policy organization of the world`s richest countries. “It`s a B-minus performance.” The slow growth has had harmful consequences, Ms. Mann said, contributing to weak labor markets and rising inequality in many countries.

With energy prices relatively low and monetary policy accommodative, growth next year should reach 3.8 percent, she said. That would be the strongest level since before the 2008 credit crisis, Ms. Mann noted, though she expressed concern about the weak start to 2015 and the continued poor investment climate.

Ms. Mann said she expected global fixed investment, which she described as “a key component of potential output,” to increase by about 4 percent next year, the highest since the financial crisis started in 2008. Even that level would fall short of the amount needed to return labor markets to normal and raise living standards for those who have missed out on the recovery, she said.

She cited several risks, however, to that relatively optimistic picture. Among them are the Greek economic and fiscal crisis, which still remains unresolved; the possibility of a sharp slowdown in China; and the danger that financial markets will slump when the Federal Reserve begins raising interest rates.

The United States, which lost ground in the first quarter by one key measure — changes in gross domestic product - is expected to eke out an advance of about 2 percent for the year as a whole, accelerating to 2.8 percent next year, according to the O.E.C.D. forecast.

“U.S. growth projections remain weak compared with recoveries we`ve seen in the past,” Ms. Mann said. The organization projected that the Federal Reserve would raise interest rates to 2 percent by December 2016, from a current level near zero. Despite its relatively meager outlook, the United States economy, by most measures, continues to outperform nearly all other advanced industrial nations.

The Eurozone will also start to perk up, the O.E.C.D. forecast, growing 1.4 percent in 2015 and 2.1 percent in 2016, after a 0.9 percent expansion in 2014. It warned that high unemployment would continue to weigh on the euro currency bloc`s prospects, with only a gradual decline, to around 10 percent, by the end of 2016. The O.E.C.D. predicted that the European Central Bank and Bank of Japan would continue to hold rates near zero through the end of 2016.

The O.E.C.D. forecast that China, which has posted growth well above 7 percent in recent years, would fall short of that level, which is considered necessary to keep unemployment from rising. It said the increase in output could slow to 6.8 percent this year and 6.7 percent in 2016.

The organization, based in Paris, is the official research arm for 34 of the world`s most-developed economies, including the United States, the European Union`s 28 member states and Japan. Mexico and South Korea are members, but several nations with rising economies, including Brazil, China, India and Russia, have not joined.

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