While equity and commodity markets have recovered, it is an almost consensus view that already tepid global economic growth in H2 2015 likely weakened furthered in Q3 and shows few signs of recovering near-term,
Governments, lacking in both leadership and fiscal-reflation headroom, have passed the buck to central banks struggling to hit multiple growth, inflation and financial stability targets.
However, talk of global recession let alone economic collapse is somewhat overdone and I reiterate my long-held view that the global growth story is a cause for concern, not panic (17 December 2014).
Global GDP growth has been mediocre but pretty stable in the past three years at around 2.4 and 3.2%, according to respectively World Bank and IMF estimates, so perhaps it is the expectation of a return to pre-2008 growth rates which is unfounded.
International institutions have revised down their global GDP growth forecasts for 2015 but history suggests that the IMF’s 2015 forecast of 3.1% growth may prove a tad too pessimistic.
The focus on China’s ill-defined “hard-landing” and “true” growth rate has obscured the fact that growth in US, still the world’s largest economy, is back to its long-term average.
Finally, while policy-makers are running out of tools to spur their economies, a number of emerging market central banks, including in China and India, still have room to cut policy rates further.
Four themes have hogged the headlines this year – Greece, China, the Fed and linking these three topics…the risk of deflation and associated damage to the global economy.
At the risk of over-simplifying a complex picture, what is striking is that global headline and core inflation have actually been pretty well behaved (see Figure 1). Further analysis shows that headline and core inflation have evolved in reasonably narrow ranges since early 2013 in the world’s largest developed economies as well as China and Mexico. The fact these inflation data series are a little boring is in itself noteworthy given that central banks typically favour low and stable inflation. Read more
The dramatic 55% fall in crude oil prices in the past year has brought clear benefits to oil importing nations, which include the US and most of the European Union (bar Norway) and Asia (bar Malaysia). Governments have been able to cut oil subsidies (e.g India, Indonesia and Egypt) and alleviate fiscal pressure, energy-intensive manufacturers’ input costs have shrunk and consumers are enjoying a tandem fall in petrol pump prices and heating bills. Read more
Tandem fall in equities and oil
Equities have tanked in the past fortnight. While the US Dow Jones is still up about 4.7% year-to-date, global equities are down 1-2%. Eurostoxx 50, emerging markets and the FTSE 100 are down about 1%, 7% and 8.5% respectively (in local currency terms). There are arguably multiple causes to the equity slump and greater volatility since mid-year, including the backdrop of global conflicts (Russia-Ukraine, Syria etc…). In the UK, very uncertain general elections in five months time have not helped either (as I discussed in Labour still ahead of Conservatives but UKIP is potential kingmaker). Read more