Global economic slowdown in real danger of persisting
LONDON, October 16, 2015
The global economic slowdown shows a clear risk of extending into next year, along with an even more prolonged period of disinflation, according to the overwhelming majority of nearly 300 economists polled by Reuters around the world.
That threat, flagged by analysts who generally have been too optimistic about prospects for recovery since the global financial crisis, comes despite ultra-easy monetary policy from most major central banks for the last half decade.
Following the US Federal Reserve's decision last month against raising interest rates from zero, citing worries about the global economy, and particularly China, a historic era of stimulative monetary policy is set to last even longer.
The poll also suggested that those few economies which have perked up this year, particularly the United States, the euro zone and Britain, are increasingly exposed to waning global demand and may not be able to maintain their momentum.
"Worryingly, for the regions that have shown the most resilience - the US and Europe - the outlook seems to become more clouded," wrote Christian Keller, head of economics research at Barclays, in a note called "Enter the doldrums."
The concern coincides with a growing sense of unease in financial markets, where market experts polled by Reuters have also taken a knife to all sorts of asset forecasts, from global stock indexes to sovereign bond yields, oil prices and emerging market foreign exchange rates.
So while 2016 is still forecast to be better than this year for most major economies, economists have trimmed their forecasts as the year has progressed, much as the International Monetary Fund has just done.
But this time, the downgrades are piling up in a much more notable way.
Growth forecasts are lower and economists have chopped their inflation outlook across the board for most countries, with lower highs and lower lows, suggesting aggressive monetary policy has had very little effect so far in boosting inflation.
"As has become a familiar trend over the past two years, the latest revisions to our inflation forecasts for both 2015 and 2016 are downwards for the developed world," said James Pomeroy, economist at HSBC, adding that emerging markets growth forecasts were the weakest since 2009, the nadir of the financial crisis.
International trade has taken a significant hit this year, the biggest also since around that time, and that has further clouded the economic outlook.
Global growth is forecast to clock 3.1 per cent this year, followed by 3.4 per cent next. But that is based on expectations for easy monetary policy everywhere, with no major correction in global financial markets after years of low sovereign bond yields and soaring stock prices.
The US economy, which stalled around the start of this year as it has done several times during the course of this recovery, looks solid. But it is still not expected to accelerate meaningfully or generate much inflation, despite a very low unemployment rate.
"Seven years into the US recovery, this is frustrating for the Federal Reserve, which is still itching to raise interest rates," added HSBC's Pomeroy.
"For now though, the US is once again feeling the brunt of the latest round of the deflationary 'pass the parcel', which has been plaguing the global economy since 2008."
Britain is in a similar situation. And the euro zone has a herculean task ahead in tackling chronically-high unemployment and low inflation that no expansion or extension of its trillion-euro asset purchase programme is likely to solve. Scandinavian economies are likely to perform a bit better.
The real worry in the near term centres around emerging markets, which have carried global growth in recent years.
An unprecedented borrowing binge by the Chinese authorities to fuel infrastructure development has propped up growth in the world's second largest economy throughout the most trying times for developed economies since the global financial crisis.
But now that has come to an end, and the central bank has delivered a series of interest rate cuts to soften the blow from a deliberate attempt to rebalance China's economy away from exporting manufactured goods toward domestic consumer spending.
It has had mixed success. Economists expect China's official growth rate, which many suspect overstates the economy's underlying performance, to come in below Beijing's seven per cent target for this year and slow further into 2016.
Other emerging market economies look set to perform poorly.
South Africa increasingly looks to be gripped by weak growth but persistent inflation, and Brazil's has nosedived into recession as the central bank jacked up interest rates aggressively to tackle inflation, with very limited success.
"For almost 10 years, Latin America's economies could pretty much sit back and enjoy the ride," said Marcelo Carvalho, head of Latin America economic research at BNP Paribas.
"Those days are over." - Reuters
