Global economy flashes warning signs
March 3, 2016
A more complete set of economic data showed that the global economy expanded at its slowest pace in nearly three years in Q4 as the ongoing slowdown in emerging-market nations was accompanied by deteriorating economic conditions in advanced economies. The global economy expanded 2.3% annually in Q4, which was below the 2.6% expansion tallied in Q3. On top of the decelerations in China and the United States that were reported in the previous month’s report, results of note in Q4 include a year-on-year slowdown in the Eurozone, India and Japan. Growth was negatively affected in both the common-currency area and Japan by worsening trade conditions, while, in India, tighter financial conditions and lower external demand dragged on economic activity. FocusEconomics Consensus Forecast panelists expect the global economy to expand 2.4% in Q1.
Weaknesses that plagued growth in 2015 are far from abating and seem that have carried into the first quarter of the year. Overcapacity in certain sectors, high corporate debt and authorities’ willingness to tolerate slower growth all are posing downside risks to China’s economy and, indirectly, hitting economic activity in emerging-market nations. This situation is exacerbated by still-weak dynamics in the Eurozone and Japan, while growth in the United States seems unable to shift into higher gear.
While the drop in oil prices is helping to improve the external position of some countries, it is also fanning deflationary pressures across the globe and threatening a protracted global economic recovery. Moreover, any deal to support oil prices seems highly improbable due to the lack of trust among big crude producers. In the same vein, the tentative agreement between Qatar, Russia, Saudi Arabia and Venezuela to freeze oil output shows that, in order to be successful, a deal regarding oil prices needs to include a cut in production and must also involve other key players such as Iran, Iraq and, in particular, the United States.
Another factor that will play a decisive role this year is politics. In the European Union, the UK’s 23 June referendum that poses the possibility of a Brexit is triggering fears that this could mark the first step toward the disintegration of the European bloc. In the United States, the rise of political outsiders ahead of the 8 November elections is casting doubts about future economic policies in the world’s superpower and its role in global politics.
In order to shield their respective economies against a sharp economic downturn or political instability, Central Banks have started to kick in. In recent months, most of the world’s key central banks have expanded their stimulus programs and/or cut interest rates. Meanwhile, the Federal Reserve of the United States is adopting a more cautious stance and seems to have halted its tightening cycle.
Doubts about strength of the global economy continue to weigh on 2016 outlook
Uncertainty regarding the state of the world’s two largest economies, China and the United States, coupled with jitters in financial markets, continued low oil prices and tepid global demand, are all taking their toll on growth. The economic analysts we surveyed for this month’s Consensus Forecast panel cut their 2016 global growth forecast for the second consecutive period. The panel lowered its estimate for 2016 by 0.2 percentage points to 2.8%. 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 some advanced economies. Panelists cut their forecasts for Japan, the United Kingdom and the United States, while they made no change to their growth estimate for the Eurozone. Despite increasing fears about the health of China’s economy, the panel left the forecast unchanged, leading to a stabilization in the projection for the entire ex-Japan Asia region. Worsening economic prospects for Brazil and Russia prompted analysts to downgrade their views for those regions as well. As a result of the low-commodity-price environment and the lack of prospects for reaching an agreement that would boost crude prices, panelists decided to cut their forecasts for the Middle East and North Africa and Sub-Saharan Africa regions.
UNITED STATES | Confidence gets a boost from upward revision to Q4 GDP
Revised data show that US GDP increased at a seasonally adjusted annualized rate of 1.0% in Q4, which was an unexpected upward revision from the previous GDP estimate. The upwardly-revised figure, which was, nonetheless, below the 2.0% expansion tallied in Q3, was the result of an inventory accumulation. Q4’s slowdown relative to the previous quarter, however, stemmed from a deceleration in domestic demand as it was dragged down by lower private consumption and weaker investment. Although a slowdown in global economic activity continues to weigh on the U.S. manufacturing sector and much attention has been paid to the recent volatility in stock markets, positive news that more jobs were created in January cooled fears that there was potential for recession.
The economy expanded 2.4% for the full year 2015, which matched 2014’s result. However, risks to the economic outlook for this year are tilted to the downside as a result of increasing fears that the global economy is losing steam and due to fact that strong volatility in the stock markets could affect consumer and business confidence. FocusEconomics panelists expect GDP to increase 2.1% in 2016, which is down 0.3 percentage points from last month’s forecast. For 2017, the panel sees GDP growth at 2.3%.
EURO AREA | Eurozone recovery continues, but political risks linger on the horizon
The recovery in the Eurozone economy continued at a modest tempo in the final quarter of 2015, according to a preliminary estimate. GDP increased 0.3% in Q4 over the previous quarter, which matched third quarter growth. Although the preliminary GDP data did not include a breakdown by components, additional data from across the continent indicate that the German economy maintained its pace of growth, while economic momentum in France and Italy was disappointing. Conversely, the Spanish economy continued to be the best performer, while the struggling economy of crisis-ridden Greece recorded another disappointing contraction. As 2016 began to unfold, the ongoing turmoil in financial markets and February’s sharp fall in both the Composite PMI and economic sentiment sharpened awareness of downside risks in the near term.
The Eurozone economy increased 1.5% in 2015 as a whole, which came in above the 0.9% expansion seen in 2014. Analysts polled this month by FocusEconomics expect the bloc’s economy to grow 1.6% this year as conditions for the recovery remain in place: low oil prices, a weak euro and an expansionary monetary policy. Nonetheless, downside risks in the form of external headwinds could cloud the outlook. Next year, analysts see GDP increasing also 1.6%.
JAPAN | Recent economic data fuel doubts about Abenomics
After three years of Abenomics, the Japanese economy seems unable to return to a sustainable growth path. In Q4, GDP fell 1.4% over the previous quarter in seasonally adjusted annualized terms (SAAR), which contrasted Q3’s 1.3% rise. More recent data suggest that weakness observed in 2015 carried into this year within a context of a relatively strong yen, faltering global demand (particularly from China) and growing doubts about Shinzo Abe’s ability to rekindle economic growth. Against this backdrop, on 26 February, the government announced that it could postpone the controversial sales tax hike scheduled for 2017 in order to avoid a sharp economic downturn. Analysts believe that if the tax hike is postponed, it could trigger another election as it happened in November 2014.
Although dynamics in the job market remain strong, a number of headwinds are clouding the economic outlook for the world’s third-largest economy. A stronger yen and subdued external demand are taking their toll on the economy. On the domestic front, the prospect of deflation is threatening to dampen consumption. Analysts see GDP expanding 0.9% in 2016, which is down 0.1 percentage points from last month’s estimate. For 2017, the panel sees growth at 0.7%.
INFLATION | Inflation in January hits 17-month high; upside risks to inflation outlook largely contained
According to preliminary data, global inflation rose from December’s 3.1% to 3.2% in January, which was the fastest rate since September 2014. Inflation is gradually increasing as the base effect from low oil prices is slowly fading away and, particularly, due to severe exchange rate pass-through in some economies due to extreme economic imbalances. Spillovers from higher food prices due to the El Niño weather cycle were also behind the recent increase in prices.
While inflation has been on an upward trend in recent months, the increase is likely to be limited as price pressures remain contained due to still-low commodity prices and protracted 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 the estimate for 2017 rising slightly to 3.3%.
Written by: Ricard Torné, Senior Economist
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