Global economic vulnerabilities and rising deflationary pressures promise a rocky 2016
February 3, 2016
The global economy expanded at its slowest pace in over two years in Q4 as growth in emerging-market economies continued to decelerate, while once-supportive developed economies failed to maintain momentum. According to preliminary data that accounts for around 45% of the world’s nominal GDP, the global economy expanded 2.4% annually in Q4, which was below the 2.6% expansion tallied in Q3. Results of note in Q4 include a year-on-year slowdown in the United States against a backdrop of a strong U.S. dollar and an inventory correction. The Chinese economy continued to decelerate gradually in the final quarter of 2015, which is consistent with Chinese authorities’ willingness to tolerate slower growth under the “new normal” approach.
The start of the year was dominated by the turmoil in China’s financial market, a renewed fall in oil prices and monetary policy developments among some of the world’s key monetary authorities. Strong capital outflows and the need to bolster China’s faltering exports drove the CNY to plummet at the outset of the year and, on 8 January, it hit a five-year low. The currency’s rapid depreciation took the markets by surprise, causing turmoil in the Chinese stock markets and financial stress around the world. This situation added to concerns about the state of the Chinese economy and, in particular, its exchange rate policy. The downward trend in crude prices observed in the final quarter of 2015 carried over into the first weeks of 2016 and, on 20 January, the average price of the Organization of Petroleum Exporting Countries (OPEC) oil basket hit its lowest value since 2002. Ample availability of crude in international markets and uncertainty about the health of the global economy are all exerting downward pressure on oil prices.
Regarding monetary policy, Central Banks are increasingly worried about the state of the global economy and the possibility of entering into a long period of low inflation or even deflation. Against this backdrop, the United States Federal Reserve decided to adopt a more cautious stance and refrained from delivering a second interest rate hike in January, after the institution increased rates for the first time since before the global financial crisis at its meeting in December. In addition, European Central Bank (ECB) President Mario Draghi hinted at further easing at the next meeting, which will take place in March, while the Bank of Japan joined the negative interest rate club by cutting one of its official interest rates below zero.
Going forward, the global outlook will continue to be mainly dominated by the same forces: developments in China and crude prices. Analysts have not only expressed concerns about the situation of the Chinese economy, but also consider that a sharp depreciation of the CNY could spur a currency war with its Asian neighbors, thereby promising to destabilize financial markets globally. While the current low oil price environment has helped to improve the terms of trade in most of the world’s largest economies, it has also fueled deflationary pressures, putting at risk the ongoing global economic recovery. That said, there are some upside risks to the global outlook. Developed economies are gradually shifting into higher gear, while domestic challenges that plagued some of the key emerging-market economies are starting to fade. Against this backdrop, Met the why particular Consensus Forecast panelists expect the global economy to expand 2.5% in Q1.
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Uncertainty over the global economy drives this month’s cut to the 2016 outlook
The economic analysts we surveyed for this month’s Consensus Forecast panel cut their 2016 global growth forecast following a stable outlook in the previous period. This month’s deterioration came on the back of rising concerns about the health of the global economy following the sharp decline in oil prices and jitters in China’s financial markets at the start of the year. The panel lowered its estimate for 2016 by 0.1 percentage points to 3.0%. In 2017, the panel expects global growth to strengthen to 3.2%.
This month’s cut to the global forecast for 2016 was the result of a deterioration in the projections for both advanced and emerging-market nations. Panelists cut their projections forthe Eurozone, Russia and the United States. The outlook for China was left unchanged, thereby driving the outlook for ex-Japan Asia to stabilize. Brazil continued as one of the world’s main black spots due to its entangled political situation and severe economic imbalances. This situation prompted our panelists to downgrade their view for the entire Latin America region. As a result of the drop in commodity prices observed in recent weeks, panelists decided to cut their forecasts for the Middle East and North Africa and Sub-Saharan Africa regions. Among the rest of the world’s largest economies, Japan’s outlook was stable as panelists took into account the country’s better trade and income prospects.
UNITED STATES | Strong dollar and investment hit growth in Q4
An advance estimate showed that the U.S. economy slowed in the final quarter of last year. GDP increased at a seasonally adjusted annualized rate of 0.7% in Q4. The result, which was well below the 2.0% expansion tallied in Q3, reflected a slump in fixed investment as energy firms reacted to low oil prices and a collapse in export growth due to a strong dollar. Private consumption, the motor of the economy, also moderated in Q4 but remained relatively resilient in face of an uncertain environment. The economy expanded 2.4% for the full year 2015, which matched 2014’s result, and it will likely continue along a stable path this year. Weakness in the manufacturing sector is expected to continue, but the labor market is set to build on last year’s impressive gains and consumer confidence should strengthen in the months ahead.
Despite ongoing challenges at home and abroad, the economy will continue to grow at a steady rate and be one of the major drivers of global growth next year. Met the why particular panelists expect GDP to increase 2.4% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel also sees GDP growth at 2.4%.
EURO AREA | Private consumption continues to drive the recovery
The Eurozone economy likely grew around 0.4% quarter-on-quarter in Q4 2015 following the 0.3% increase in Q3. Domestic demand, in particular private consumption—the driver that has boosted the Eurozone economy—continued to be buttressed by a recovery in the labor market and a sharp fall in oil prices. The labor market improved further in November when unemployment dropped to an over-four-year low. Meanwhile, global oil prices fell more than 11% on average in 2015, which meant a boost in European households’ disposable income and supported the recovery in corporate profits. Nevertheless, turmoil in financial markets at the outset of the year and January’s larger-than-expected fall in the Composite PMI and economic sentiment should sharpen awareness of downside risks in the coming months.
After an expected 1.5% expansion in 2015, analysts surveyed by Met the why particular project Eurozone GDP to increase 1.6% in 2016 as conditions for the recovery remain in place: low oil prices, a weak euro, ultra-loose monetary policy and fiscal policy no longer acting as a drag on growth. However, these favorable conditions may not be sufficient to fuel faster growth if sluggish confidence dampens capital and consumer expenditures. Moreover, downside risks to the outlook in the form of external headwinds prompted analysts to cut the forecast by 0.1 percentage points from last month’s projection. Next year, analysts see GDP increasing 1.7%.
JAPAN | Key minister resigns amidst graft accusation
After rebounding in Q3 on stronger-than-expected dynamics in investment, GDP likely decelerated in Q4 as manufacturing activity was less robust and investment was less buoyant than in Q3. On the upside, continued low oil prices, coupled with stronger consumer confidence, likely acted as a cushion to support the economy. In the political arena, Prime Minister Shinzo Abe faced his most serious challenge since taking office in 2012: Akira Amari, Minister of State for Economic and Fiscal Policy, resigned on 28 January amidst corruption allegations. Amari was one of Abe’s most trusted allies and Japan’s chief negotiator for the Trans-Pacific Partnership (TPP) agreement. The scandal represents a significant blow for Abe and increases uncertainty regarding the future implementation of Abenomics economic policies.
Improving dynamics in the labor market and low energy costs are expected to support growth this year, while an abrupt slowdown in China continues to be the main risk to the Japanese economy. Moreover, the overall outlook remains challenging due to the absence of bold pro-growth reforms needed to bolster Japan’s long-term growth. Panelists see GDP expanding 1.0% in 2016, which is unchanged from last month’s estimate. For 2017, the panel sees growth at 0.7%. 1.0% in 2016, which is down 0.1 percentage points from last month’s estimate. For 2017, the panel sees growth at 0.7%.
INFLATION | Low oil prices promise to keep inflation subdued in the coming months
According to preliminary data, global inflation rose from November’s 2.8% to 2.9% in December, which represented the fastest rate since November 2014. Inflationary pressures resurfaced slightly in the final period of the year mainly due to extreme currency pressures in some countries such as Argentina, Brazil, Russia, Turkey and Venezuela as a result of severe economic distress. Spillovers from higher food prices due to a severe El Niño weather cycle are also exerting upward pressure on prices.
Despite the uptick in prices, global inflation is expected to remain at relatively-low levels, particularly in advances economies, due to lower crude costs. Taking these developments into account, our panel of analysts expects that inflation will be 3.1% in 2016, which is down 0.1 percentage points from last month’s estimate. Panelists participating in our survey see the estimate for 2017 stable at 3.1%.
Written by: Ricard Torné, Senior Economist
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