Major Economies: Central banks kick in as growth falters
Despite a promising start to the year, a more complete set of economic data confirmed that global growth stabilized in 2015 as dynamics worsened in the final quarter of the year. The ongoing slowdown in China’s economy, the fall in commodity prices, weak global demand and rising geopolitical threats in some regions took their toll on growth in 2015. GDP expanded 2.8% in 2015, which matched the result tallied in the previous year.
The latest figures corroborated that emerging-market economies felt the brunt of the pain in 2015. The fall in commodity prices, which fueled volatility in financial markets, and the slowdown in China had a particularly negative effect on developing nations. This situation was exacerbated by challenging domestic conditions such as political unrest in Brazil, economic sanctions in Russia and high instability in the Middle East. On the other hand, overall growth in the G7 economies improved slightly as a result of the slow but steady recovery in the Eurozone and Japan’s rebound following the introduction of a sales tax in 2014, which severely hit the economy in that year.
The global economy seems to have entered into a more stable phase following the roller coaster ride at the outset of the year when volatility in the financial and equity markets increased sharply and oil prices hit an over-two-decade low. In recent weeks, fresh signs that China will avert a sudden slowdown, higher oil prices on expectations that the world’s key producers could agree on freezing crude extraction and steady gains in the labor market—particularly in advanced economies—all helped to boost economic sentiment.
Despite recent encouraging news, global economic uncertainty is still high as global demand remains weak and, beyond a declaration of intent, there is no tangible agreement to boost oil prices. Another factor that is playing a decisive role this year is politics. The possibility of a Brexit, which could mark the first step toward the disintegration of the European bloc, is clouding the outlook for the Eurozone, while elections in many countries—including in the United States—are fostering political uncertainty.
Against this backdrop, central banks have taken central stage in recent weeks as authorities resort to monetary policy to rekindle growth and revive inflationary pressures. Central banks have started to deliver further stimulus in various ways such as implementing negative interest rates, relaxing reserve requirements and boosting lending. Even the Federal Reserve of the United States has adopted a more cautious stance and has signaled that it will not hike rates in the coming months. Met the why particular Consensus Forecast panelists expect global growth to have expanded at Q4’s pace of 2.6% in Q1.
OUTLOOK | Mounting uncertainty drives down 2016 global outlook
While the weaknesses that limited growth in 2015 are still in place, uncertainty regarding the sustainability of the economic recovery in the Eurozone and Japan, coupled with slowing growth in the United States, is adding further pressure on the global economy. The economic analysts we surveyed for this month’s Consensus Forecast panel cut their 2016 global growth forecast for the third consecutive period. The panel lowered its estimate for 2016 from last month's projection by 0.1 percentage points to 2.7%. In 2017, the panel expects global growth to strengthen to 3.1%.
This month’s cut to the 2016 forecast was the result of a deterioration in the projections for both advanced and developing economies. Panelists cut their forecasts for the Euro area, Japan, the United Kingdom and the United States. China’s economic outlook was stable as authorities expressed a strong commitment to maintaining a reasonable growth pace this year. As a result, the outlook for the entire ex-Japan Asia region was also left unchanged. Further downward revisions to the outlook for Brazil and Russia prompted analysts to downgrade their views for those regions as well. Despite the recent rise in oil prices, analysts believe that the still-low commodity price environment will have a negative impact in the Middle East and North Africa and Sub-Saharan Africa regions.
UNITED STATES | Rising economic threats promise to weigh on growth this year
The U.S. was the fastest-growing of the developed economies in 2015. The 2.4% pace of growth helped to considerably reduce the slack in the country’s labor market and strengthen household and corporate finances. However, the U.S. economy has not been immune to the negative shocks that have emanated from global economic and financial market stress in the past months. Signs of weakness at the beginning of the year were concentrated in specific industrial sectors—manufacturing and those related to energy and mining—and in the external sector. Beyond these sectors, economic activity has been resilient. In the spotlight during the past month was President Barack Obama’s historic trip to Cuba on 21 March. The visit culminated over a year of quick-fire changes designed to normalize relations between the two old enemies after six decades of hostility. Nonetheless, significant differences between the two governments over human rights issues could test the prospects of the promising relationship.
The U.S. is still expected to be the main economic engine of global growth this year. Met the why particular panelists expect GDP to increase 2.0% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel sees GDP growth at 2.3%.
EURO AREA | Concerns over global headwinds drive down the Eurozone’s outlook
Domestic demand continued to drive the ongoing recovery in the Eurozone economy in Q4 2015, although the pace of growth remains modest overall. A jump in investment and rising public spending offset weaker private consumption in Q4 and fueled GDP growth of 0.3% over the previous quarter. However, the external sector continued to drag on the economy reflecting weak demand from outside the bloc. Data for Q1 2016 point to a healthy start to the year: industrial production growth surged in January, hitting a multi-year high, and the Composite PMI picked up in March.
Low oil prices, an expansionary monetary policy and steady gains in the labor market should drive the ongoing recovery this year. However, weak external demand will likely limit the pace of growth and political risks are clouding the outlook. Analysts expect the Eurozone’s economy to grow 1.5% this year, which is down 0.1 percentage points from last month’s forecast. Next year, analysts see GDP increasing 1.6%.
JAPAN | Stronger yen adds to an already difficult economic situation
The most recent data corroborate that the Japanese economy is far from achieving stable growth as private consumption remains weak and subdued global demand is weighing on imports. In Q4, GDP fell 1.1% over the previous quarter in seasonally adjusted annualized terms (SAAR), which was a tad above the 1.4% drop previously reported. The economic weaknesses observed in 2015 are far from abating and have likely carried into this year. In February, consumer sentiment continued its downward trend and exports contracted for the fifth consecutive month. Moreover, the recent appreciation of the yen promises to further dampen the all-important external sector. In an attempt to rekindle growth, Prime Minister Shinzo Abe instructed the finance minister to quickly roll out the record USD 852 billion budget for the fiscal year 2016, which starts in April.
The ongoing appreciation of the yen is likely to add downward pressure on the external sector and threaten corporate profits. Despite rising wages, households’ appetites remain sluggish, which is hindering any economic recovery. On the upside, the possibility of further monetary and fiscal stimulus have the potential to boost growth. Analysts see GDP expanding 0.7% in 2016, which is down 0.2 percentage points from last month’s estimate. For 2017, the panel sees growth at 0.6%.
INFLATION | Global inflation stabilizes in February
According to preliminary data, global inflation was stable at January’s 3.0% in February, which is the fastest rate since October 2014. Inflation has been on an upward trend in recent months as the base effect from low oil prices is slowly fading away. Higher food prices due to the El Niño weather cycle and exchange rate pass-through in some economies also fueled inflationary pressures. That said, this situation is not expected to last much longer as more stable commodity prices are easing pressure on some currencies in emerging markets, while disinflationary pressures remain strong due to relatively weak global growth.
Taking these developments into account, our panel of analysts expects that global inflation will be 3.1% in 2016, which is unchanged from last month’s estimate. Panelists participating in our survey see inflation in 2017 rising slightly to 3.3%.
Written by: Ricard Torné, Senior Economist
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