Global Economy Reviews

06.10.2016 14:53 World Economy Review - September 2016

The global economic recovery remains "weak and precarious", the International Monetary Fund has warned. In its latest World Economic Outlook, the IMF predicts "subpar" growth this year of 3.1%, rising slightly in 2017. "Taken as a whole, the world economy has moved sideways," said IMF chief economist Maurice Obstfeld.

The IMF also warned that the Brexit decision will hit the UK economy as it halved its 2017 growth forecast to just 1.1%. The Fund raised its 2016 forecast slightly as UK retail spending has held up better than expected after the June vote to leave the European Union.

A fall in US growth this year to 1.6%, down from the previous 2.2% forecast, will be offset by increases in countries including Japan, Germany and Russia and India. The indifferent economic recovery after the global financial crisis has been a persistent theme in the Fund`s regular World Economic Outlook reports.

The latest report warns of the danger of a pattern of underperformance becoming entrenched. Weak growth can lead to lower investment, slower productivity growth and the erosion of what the IMF calls "human capital" - which means skills and expertise.

The UK referendum result highlights wider trends in developed economies, the IMF says. "The Brexit vote and the ongoing US presidential election campaign have highlighted a fraying consensus about the benefits of cross-border economic integration," the report says.

The US reference is about the hostility to international trade agreements such as NAFTA, which involves the US, Canada and Mexico,) voiced in the election campaign. The Republican candidate Donald Trump has been the most vocal, though not the only voice expressing such views.

It is a political trend that has the IMF worried. It argues that an environment hostile to trade would make it harder for commodity exporters and poorer countries to develop new lines of exports. Such a trend would also undermine productivity growth and the spread of knowledge and technology.

Mr Obstfeld says: "It is vitally important to defend the prospects for increasing trade integration. Turning back the clock on trade can only deepen and prolong the world economy`s current doldrums."

In one important area - China - the IMF`s concerns have eased somewhat in the short term. Growth has been stable, allaying fears that China`s widely reported economic slowdown would be much more abrupt than it has been. However, there is a warning about the country`s longer-term prospects and the debt burden faced by many businesses.

"A still-rising credit-to-GDP ratio and lack of decisive progress in addressing corporate debt and governance concerns in state-owned enterprises raise the risk of a disruptive adjustment," the IMF says. That could have important international implications especially for commodity and machinery exporters, for which China is a vital market.

On the UK`s vote to leave the European Union, the IMF says the financial market reaction was "reassuringly orderly" and it has therefore edged up its forecast for growth in the UK this year. But it says the ultimate impact remains very unclear and the IMF predicts a marked slowdown in growth next year for Britain - but not a contraction.

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06.09.2016 13:44 World Economy Review - August 2016

The amount of goods traded globally fell sharply in the second quarter after a flat performance in the first few months of 2016, highlighting a major challenge for leaders around the world grappling with soft growth.

The volume of merchandise traded globally dropped by 0.8% from April to June following no change in the first quarter, according to the CPB World Trade Monitor produced by the Netherlands.

Weaker trade patterns reflect fresh economic struggles in various countries and less demand among consumers, the main drivers of growth. Import volume fell the most in the Euro area (-1.8%) in the runup to the Brexit vote. Imports to Japan also dropped 1.3% and they declined 0.6% in the U.S.

Export volume fell 0.7% overall, but the poor performance was not universal. Exports rose 0.4% in the U.S. after declining in the prior two quarters. Export volume also climbed 1% in Japan, with the Eurozone the major laggard.

There are some signs world trade has partly rebounded in the third quarter, but 2016 is shaping up to be a difficult year. The IMF, World Bank and OECD, the three most influential global economic organizations, have all recently cut global growth forecasts for 2016 in part because of a soured trade outlook.

The strong dollar has weighed heavily on U.S. trade and China is not growing as fast, two major sources of the slowdown in world trading volume. Lower commodity prices have also hurt developing nations, giving them less money to spend on imports.

Another complication: growing resistance in the U.S., Britain and elsewhere against free trade.

The Federal Reserve, meanwhile, has held off raising U.S. interest rates partly because of worries about the global economy. The U.S. economy appears to have gained momentum lately, however, and central bankers are expected to signal again this week that higher interest rates are on the way.

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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 sectorsmost notably miningsince 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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