Are we headed for a global recession?

Global-Business-BackgroundThe term to describe “higher-for-longer” commodity prices was based largely on ever-climbing demand from the Chinese as the country industrialised. Amid the excitement, commodity prices soared by more than six-fold from 2004 to 2011, as measured by the Reserve Bank of Australia’s commodity price index.[1] That index has collapsed by 63% over the past four years as Chinese demand fell and supply increased after an investment frenzy to build more projects and the revolution in shale. (A high US dollar hurts too because it boosts prices in local currencies, thus curbing demand.)

The collapse of the commodities bubble – for that’s what it was in hindsight – is buffeting emerging countries (such as Brazil, Chile, Colombia, Russia and Venezuela) that rely on material exports. And plunging commodities is only one of their problems. The prospect of higher interest rates in the US is sucking capital from emerging countries by boosting repayments on the US$4.5 trillion (A$6.3 billion) of US-dollar-denominated debt that these countries owe. Political uncertainty is dogging Brazil, South Africa, Turkey and Malaysia.

The trials of China and other emerging countries on top of the unresolved eurozone debt crisis, Japan’s inability to revive itself and the Federal Reserve’s likely imminent rate increase are fanning talk[2] the world economy is headed for recession. The underlying concern is that policymakers can’t combat any slump as high government debt hampers fiscal stimulus and interest rates are already at record lows. While no one can rule out a global recession because events somewhere could surprise much like the so-called Arab Spring did in 2010, the world economy probably has enough going for it to avoid such a gloomy outcome. Its key advantages are that the US is prospering while China is only slowing, not shrinking.

On the other hand ,with emerging markets ex-China, which comprise about 19% of the world economy, many of them are expanding robustly enough. Emerging Asia, for instance, is in much better shape than it was before the collapse of the baht in 1997 triggered the Asia financial crisis. Back then, emerging Asia was full of foreign debt, had unsupportable fixed exchange rates and was dogged by wonky financial and property sectors. Today, even as currencies drop from India to Korea, emerging Asian countries have sounder financial systems, freer exchange rates, tame inflation, current-account surpluses, large forex holdings and sturdier government finances. While these neighbours face losing export sales to China and currencies are falling accordingly, it’s more the emerging world outside east Asia that’s a bigger problem; namely, much of Latin America, the oil exporters, Russia, South Africa and Turkey.

Still, considering emerging countries as a group, when you allow for their young and growing populations and expanding middle classes driving consumption, their resources, pro-business governments (to generalise), infrastructure needs and low labour costs, the IMF’s forecast of 4.2% growth for 2015 (including China) looks reasonable.

China, as 13% of the world economy, deserves separate analysis. No one denies that China confronts challenges as it shifts from an investment- and export-led economic model to one driven by consumption.

Admittedly, slabs of the advanced world are struggling. The eurozone, which covers 17% of the world’s economy (to outsize China), is yet to regain its pre-crisis size. So it can be classed as in a depression. But the deflation-prone euro area is eking out growth (0.3% expansion in the second quarter) as low interest rates, falling commodity prices, an improving labour market and higher wages are aiding consumer demand. The Greek saga is a threat, for sure. But what Athens’ recent near-default and near-exit from the euro showed is that the Balkan country’s troubles appear to do little immediate economic damage to neighbours.

Luckily for the world, the rest of the advanced world is thriving, especially the US, which grew at a vibrant 3.7% annualised pace in the June quarter. Retail sales are buoyant, consumer confidence is touching eight-year highs and the jobless rate is at a seven-year low of 5.1%. Housing is humming. Business investment is climbing and the government is injecting stimulus. Exports play a relatively minor role in driving US growth (at just 13% of GDP compared with 50% for Germany) so the country is insulated from miseries abroad. While wages are stagnant, productivity sluggish and there is some hidden unemployment, at least no hooligans in Washington are threatening showdowns over raising the country’s debt limit – at least, not before next year’s congressional and presidential elections. All said, consumer spending is expected to help the US maintain its 3% annual pace of growth into 2016 and beyond.

Advanced economies less the US, the eurozone and Japan amount to 23% of the global economy. The IMF predicts 2.2% growth this year for advanced economies overall. That appears a reasonable outlook for countries including Switzerland and the UK, for most of them will benefit from lower commodity prices – even if they are not so good for Australia (1.9% of world GDP) and Canada.

All up, economist might be prudent to trim their global growth forecasts for the next 12 months. But they shouldn’t go too much below the 3.3% the IMF in July forecast for 2015 or the 3.8% it predicted for 2016.[3]

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The article is by Michael Collins, Investment Commentator at Fidelity,September 2015

Country and regional percentages of world output come from the World Bank’s database and measure gross domestic product for 2014.http://databank.worldbank.org/data/download/GDP.pdf. IMF growth forecasts are estimates taken from the World Economic Outlook – July 2015, Table 1 (Overview of the World Economic Outlook projections) on page 4 that give estimates for 2015 and 2016 rather than the upcoming 12 months. Other financial information comes from Bloomberg unless stated otherwise.

[1] Reserve Bank of Australia. Commodity price index. In SDR terms, the index rose from 24.4 in January 2004 to a peak of 162.2 in May 2011 before falling to 60.0 in July 2015. http://www.rba.gov.au/statistics/frequency/commodity-prices/2015/icp-0715.html. By way of comparison, the Bloomberg Commodity Index shows an increase of 140% from 1999 to 2011 and a 52% tumble since then.
[2] Bloomberg News. “China will respond too late to avoid a recession, Citigroup says.” 28 August 2015.http://www.bloomberg.com/news/articles/2015-08-27/china-will-respond-too-late-to-avoid-recession-citigroup-says
[3] IMF. World Economic Outlook Update release. “Slower growth in emerging markets, a gradual pickup in advanced economies.” 9 July 2015. http://www.imf.org/external/pubs/ft/weo/2015/update/02/pdf/0715.pdf

Halle Yilmaz is a financial adviser and business consultant. As a financial adviser, she gives solid advice that can create rapid and lasting results for her clients. Sign up for her free E-Book and download “7 Steps to Healthy Wealth Management.” Follow Halle on Twitter @halleyilmaz

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