We’re still in January, but the year so far has been characterised by fears for the strength of the global economy. Ironically, a lack of confidence itself is a serious risk to the global economy, which at its most extreme could lead to exactly what the doomsayers are proclaiming – a return to global financial crisis.
China is at the eye of the storm. A fall in the renminbi in the first few days of the year spooked markets and led to a sell-off and volatility globally and declining confidence in Chinese economic management. China’s continuing slowdown in the real economy is contributing to weak commodity prices, with oil falling to below US$30 per barrel (West Texas Intermediate) in January for the first time in 12 years. Weak commodity prices are a boon to those reliant on commodity imports, but put pressure on the balance sheets of commodity exporters – especially emerging markets, some of which (including Brazil and Russia) are already struggling.
10 Most-Affected Economies in the Scenario of a China Hard Landing: 2016
Source: Euromonitor Analytics Macro Model
Note: The scenario refers to a China hard landing starting in Q1 2016. Chinese output drops by 9% relative to the baseline forecast in the first 2 years of this scenario. The long term effect of a Chinese hard landing is a decline in the level of GDP of more than 11% relative to our baseline.
In the UK, the Chancellor’s January speech highlighted a number of global economic risks to the UK economy, warning against “creeping complacency” and a “dangerous cocktail” of global risks in direct contrast to his Autumn Statement which was broadly positive. The referendum on “Brexit” casts a shadow over the UK economy. South Africa has seen its currency fall sharply as it struggles with global and domestic challenges. The impact of tighter monetary policy in the USA is also being watched with concern – especially in emerging markets which have benefitted from inflows of foreign capital whilst money has been cheap. In the EU, the refugee crisis continues unabated and is putting pressure on European solidarity.
On the upside, export data from China was better than hoped for in December with a sharp slowdown in the rate of decline. In the USA stronger-than-expected jobs data cheered markets. On the whole, economic fundamentals point to recovering and strengthening growth in developed markets.
A difficult year
On balance, downside risks to the global economy in 2016 far out-weigh those on the upside. It will be another difficult year – however we are not expecting a return to all-out crisis. Our baseline scenario sees growth in the region of 3.5% this year with the probability of a global crisis at 2-4%.