Global Economy Reviews
08.05.2016 12:51 World Economy Review - April 2016
Negative interest rates are the right policy for the world economy, the International Monetary Fund (IMF) has said, though it has warned central bankers and policymakers to stay vigilant about the potential for the “unprecedented” policy to cause significant side effects.
A study published ahead of the IMF`s spring meeting in Washington DC alongside the World Bank, has concluded that on balance, negative interest rates “help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability.”
“Still, there are limits on how far and for how long negative policy rates can go … both in terms of the extent to which central banks can set rates at negative levels and the length of time they can remain negative,” Jose Vinals, Simon Gray and Kelly Eckhold from the IMF said.
Restrictions on the use of negative interest rates - currently being used by six central banks - centered not only on a de facto `floor` for how low they could go before people started hoarding cash, but also on the impact negative rates would have on savers, investors and pensioners along with what the IMF called “significant political economy and social limits”.
“The public may feel that they are being `taxed` if and when deposit rates increasingly turn negative,” researchers warned, as they estimated that the effective basement for negative rates could be anywhere between minus 0.75 - minus two per cent, depending on the country.
“There may also be excessive risk-taking. As banks margins are squeezed, they may start lending to riskier borrowers to maintain their profit levels … Weak loans could become harder to detect, and vital corporate restructuring could be delayed.”
Perhaps most worryingly, the IMF also said that “negative interest rates may induce boom and bust cycles in asset prices.”
“These potential risks require close monitoring and supervisory scrutiny,” the Fund concluded, but confirmed that it “support[s] the introduction of negative policy rates … given the significant risks we see to the outlook for growth and inflation.”
06.04.2016 14:00 World Economy Review - March 2016
There is a near one in three chance the world economy will slip back in to recession this year as low oil prices and extraordinary monetary stimulus have a dwindling impact on global growth, Morgan Stanley has warned.
The US investment bank said a "low growth environment" had made the world vulnerable to a litany of shocks, including fears that central banks have lost control over domestic financial conditions, while rising political risks from Europe to the Middle East threaten to overwhelm governments.
Global growth is forecast to hit just 3pc this year, down from Morgan Stanley`s earlier estimate of 3.3pc, with advanced world growth falling to 1.5pc.
Japan received the biggest single downgrade of any country, with GDP slashed in half to just 0.6pc from 1.2pc.
Global GDP fell to 2.3pc in the last quarter of 2015 - below the 2.5pc threshold, which marks a recession - forcing Morgan Stanley to raise their global recession risk probability from 20pc to 30pc.
"The renewed slowdown in global growth late last year has pushed the risk of a recession higher," said Elga Bartsch at Morgan Stanley.
Despite a record crash in global oil prices over the last 20 months - widely seen as a tax cut for the world`s oil consumers - the positive effects of lower oil prices were not as pronounced as previous eras, said the investment bank.
It noted that fuel high taxation in many countries meant many consumers were failing to see the full benefits at the pumps, while investment was collapsing in major producer countries such as the US.
Contrary to many expectations, consumers in the advanced world have also failed to spend the windfall from lower prices, opting instead to pay down debts and save. Lower consumption levels have thus weighed down on economic activity.
"The global economy does not seem to be as responsive [to lower oil prices] as it has been in the past", said Ms Bartsch.
Their bearish outlook was also driven by the inability of central banks "to pull the global economy out of its low-growth, lowflation rut".
The European Central Bank redoubled its efforts to revive growth and inflation in the Eurozone last week, announcing its first foray into corporate bond buying, slashing interest rates, and providing a series of cheap loans to commercial banks.
Eight years after the financial crisis, the size of the ECB`s balance sheet will finally overtake that of the US Federal Reserve and Bank of England at more than 20pc of the bloc`s GDP, according to JP Morgan.
However, analysts noted that investors were no longer in thrall to central bank action. The euro strengthened and equities fell in the immediate aftermath of the unexpectedly large stimulus package.
Faltering market confidence is worrying for policymakers as it "could undermine the effectiveness of monetary policy" much of which is aimed at weakening exchange rates to boost inflation.
"Repeated easing initiatives seem to have a diminishing effect on financial markets, portfolio reallocation and economic sentiment", said Ms Bartsch.
Tighter financial conditions and moderate growth has forced the investment bank to slash its initial expectation of three interest rate hikes from the Federal Reserve this year, to just one. US growth is expected to slow to 1.6pc this year, down from 1.8pc.
Morgan Stanley also expect the ECB to end the year with a -0.5pc deposit rate and the Bank of Japan to carry out another 20 basis point cut to its already negative rate by July.
"The global economy is still stuck in a low-growth environment characterized by weak demand dynamics, subdued investment spending, low inflation rates, elevated unemployment, as well as modest wage and productivity gains. This leaves us vulnerable to shocks," said Morgan Stanley.
07.03.2016 00:30 World Economy Review - February 2016
Paris-based Organization for Economic Co-operation and Development (OECD), a think tank funded by wealthy countries, cut its 2016 global growth forecast to 3 per cent in its interim economic outlook, from the 3.3 percent it forecast in November.
The OECD poured cold water on any lingering hopes of a pick-up in global economic growth this year, slashing its forecasts for the United States, Europe and Brazil and urging world leaders to act collectively to strengthen demand.
The OECD forecast would mean global growth this year would be no higher than in 2015, itself the slowest pace in the past five years.
Trade, investment and wage growth remained too weak, the OECD said, urging world leaders to deploy all policy levers to stimulate growth urgently.
"Monetary policy cannot work alone," it said. "A stronger collective policy response is needed to strengthen demand," it added, urging countries with room for fiscal expansion to raise public investment in infrastructure projects.
The US and Germany suffered the biggest downgrades among major developed economies, with the OECD slashing its 2016 forecast by half a percentage point for both countries to 2.0 percent and 1.3 percent respectively.
The OECD now expects US and euro zone growth to slow from the previous year, to 1.4 per cent for the latter, and to pick up only marginally in 2017 to 2.2 percent and 1.7 percent respectively.
The OECD left its forecasts for Chinese growth unchanged for the next two years, but it still expects growth to slow to 6.5 percent in 2016 and 6.2 percent in 2017.
In the euro zone, the positive effect of lower oil prices on activity has been less than expected, the OECD said, while very low interest rates and a weaker euro had yet to lead to sustained stronger investment.
Across the Atlantic, US growth slowed in the second half of last year under the weight of a stronger dollar, which dragged on exports, and the impact of lower oil prices on the country`s large oil and gas industry.
Among the largest emerging economies, Brazil was seen as a major victims of falling commodity prices, with a recession expected to be deeper than feared at -4.0 percent this year.
In a rare bright spot, the OECD raised its 2016 forecast for India`s growth by 0.1 percentage points to 7.4 percent.
05.02.2016 19:10 World Economy Review - January 2016
The International Monetary Fund lowered its forecast of global economic growth over the next two years amid the deepening slowdown in emerging markets and a continued slump in oil prices.
The IMF now projects the world economy will grow 3.4 percent this year and 3.6 percent in 2017. That pace would be faster than last year, but the projections are 0.2 percentage points lower than the IMF estimated in the fall — a sign that the global recovery is still struggling to build momentum.
“Growth expectations seem to fall consistently,” said Maury Obstfeld, economic counsellor at the IMF. “I think the year coming is going to be a year of great challenges.”
China officially announced that its growth rate had slowed to 6.9 percent in 2015, the slowest pace in a quarter century. The IMF forecast that growth in China will further slow to 6.3 percent this year and fall to 6 percent in 2017 - below Beijing`s official target for the pace of expansion. Many analysts are skeptical of the country`s estimates of growth, and some fear its economy is in much worse shape than officials are willing to acknowledge.
China`s boom had been built on exporting its low-priced goods around the world, driving domestic investment in factories, equipment and infrastructure. China`s seemingly insatiable demand for raw materials also helped buoy resource-rich countries such as Brazil and Zambia.
Now the tide is turning. Chinese exports face stiff price competition from other Asian countries at the same time that worldwide demand is sagging. Beijing is attempting to shift the country`s economic engine from manufacturing and trade to consumer spending, but the adjustment is slow and painful. And lately, investors have begun to question whether officials are up to the challenge.
“We don`t see a big change in fundamentals in China … but the markets are certainly very spooked by small events that they find very hard to interpret,” Obstfeld said.
The slowdown in China is spilling over to several key emerging markets, which had ridden Beijing`s coattails to prosperity during the boom. The IMF pointed to political upheaval and a sharper contraction than expected in Brazil as a key factor behind the downgraded global forecast.
Meanwhile, the IMF said it expects oil prices to remain “low for long.” The price of Brent crude oil on international markets recently fell below $30 a barrel, a psychologically important benchmark. Many analysts also expect Iran to ramp up production after U.S. sanctions were lifted this weekend, adding to the global supply glut and holding back prices.
Emerging markets had supported much of the growth in the world economy following the 2008 financial crisis. But as they slow down, countries such as the United States and those in Europe lack the momentum to pick up the slack. The IMF estimates that advanced economies will grow a modest 2.1 percent this year, compared to the 4.3 percent rate of growth in emerging markets.
The IMF also reduced its estimate for U.S. growth, projecting it will plateau over the next two years at 2.6 percent. The Federal Reserve recently began withdrawing its support for America`s economy by raising interest rates. The move was intended to signal its confidence in the resilience of the recovery, but the IMF suggested the economy may not be as robust as hoped. “We`re not as optimistic about a pickup in U.S. growth,” Obstfeld said.
09.01.2016 12:23 World Economy Review - December 2015
A sharp slowdown in the world`s second largest economy China would hit global growth hard, according to a report by Fitch ratings agency, which warned of "significant knock-on effects" for the rest of the world.
In its report published in December, Fitch warned that a sharp slowdown in China`s GDP growth rate to 2.3 percent during 2016-2018 "would disrupt global trade and hinder growth, with significant knock-on effects for emerging markets and global corporates. In turn, this would keep short-term interest rates and commodity prices lower for longer."
Global GDP growth is currently expected to be 3.1 percent in 2017, according to Oxford Economics` global economic model which was used by Fitch to frame its "shock" China scenario. But if a slowdown of such a magnitude materialized in China, Fitch said global GDP growth would slow to 1.8 percent in 2017.
As a result, any rise in U.S. and euro zone short-term interest rates would be postponed, and oil prices would remain under pressure, Fitch said.
"Lower-for-longer in terms of growth, interest rates and commodity prices, could be the defining mantra of this decade for the major advanced economies if a Chinese shock scenario materializes," Bill Warlick, senior director of Macro Credit Research at Fitch, noted in the study.
While Fitch emphasized that this hypothetical scenario did not reflect its current expectations for China`s growth, it was "designed to test credit connections between China and the rest of the world."
In terms of these "credit connections", a China slowdown would "impair" the credit profiles of many companies globally, particularly commodity-dependent ones in oil and gas, steel, and mining, Fitch said.
"Shipping companies would also suffer, as commodities account for a significant portion of freight volume. The global technology, heavy manufacturing and automotive sectors would also feel increased credit pressure due to a slowdown in Chinese demand," the agency warned.
Andrew Steel, managing director of Asia-Pacific Corporates Ratings at Fitch, said commodity companies already under pressure from slowing China demand and falling prices, would be pressured further.
"Knock-on effects like anaemic or slowing global consumer demand and commodity supply gluts would persist or worsen," Steel predicted.
Within Fitch`s rated portfolio, 25 percent of oil and gas companies and 52 percent of other commodities companies are already sub-investment grade. If the slowdown scenario materialized, it could create ripple effects through the high-yield bond market, the agency said.
China`s growth rate is expected to be 6.8 percent in 2015, according to the International Monetary Fund`s latest "World Economic Outlook" report published in October.
Although robust, that growth rate has been slowing down year on year, reflecting slower economic conditions in the rest of the world. In 2013, China`s economy grew 7.7 percent but in 2014 China`s GDP expanded by 7.3 percent. The IMF predicted further slowing growth in 2016, of 6.3 percent.
Fitch`s Warlick said markets were watching China for signs of the slowdown accelerating. "China`s rapid rise as a global economic power, and its deepening ties to the rest of the world, have forced global credit investors to weigh carefully the potential impact of a sharp China slowdown," he said in the report.
"After tracing China`s financial and trade links around the world, it`s clear that a greater-than-expected deceleration in Chinese economic activity would have far-reaching implications for global growth, corporate credit quality and monetary policy."