Global Economy Reviews
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.
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.”
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.
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."