In its July Update of the World Economic Outlook, the IMF concludes “The projected pick-up in global growth … has not yet firmly materialised”. The US economic recovery has been hit by the combination of a stronger dollar and the sharply lower oil price (albeit that both these factors have tended to reverse of late); the European economic recovery has been impacted by the Greek debt crisis (albeit that contagion has been limited thus far); In Japan, consumption spending has been weaker than expected; China is experiencing a major correction in its overheated stock market (and growth continues to recede) and a range of emerging economies have been impacted by tighter financial conditions, lower commodity prices, geo-political tensions (in certain areas) and structural bottlenecks. It is evident that a number of headwinds have slowed down the world economic recovery and is the reason why forecasts are being scaled down.
The first quarter of 2015 world economic growth rate came in at 2.2% and growth is projected to strengthen to around 2.5% for the year, which may be slightly weaker compared to 2.7% in 2014. With the foundations for the economic recoveries in the USA and Euro area remaining intact, as well as that of Japan; China’s government stimulating its faltering economy and other emerging economies’ slowdown bottoming out, world economic growth should be stronger next year and going into 2017. At this stage the balance of risks seems to be tilted on the downside.
Regional context
Euro area. The Greek debt crisis drew much attention in recent weeks; however, from July economic indicators it seems both financial contagion to other peripheral Euro area member countries and in terms of adverse real economic impacts the damage has been contained. We remain convinced that some deal will be reached between the Greek government, the IMF and ECB/ EC despite strong political protest. The regional economy remains in best shape over the past four years, with the July flash composite PMI only dipping slightly from the four-year high reached in June. The economic momentum remained close to a 1.6% pace going into the third quarter and as noted previously this momentum is likely to build further equaling the growth of the leading US economy next year and going into 2017.
USA. While US real economic growth disappointed somewhat during the first half of the year, a 2% trade-weighted depreciation of the dollar and a jump in the oil price during the second quarter counter the headwinds from the earlier dollar appreciation and oil price plunge. The latter elements negatively impacted the industrial sector. However, the services sector of the economy, wage growth and reviving consumer spending, boosted by the lower oil price, continue to drive the economic recovery. Fixed investment spending and hiring are also picking up momentum. The economy is seen gradually strengthening from slightly above 2% real GDP growth rate this year to 2.5% growth next year. It will be difficult to accelerate during 2017 given the realities of fiscal deleveraging and the necessary unwinding of the QE stimulus over the 2010-2014 period.
Japanese real economic growth came in stronger than expected during the first half of the year, but that was mainly due to a stronger acceleration of capital spending; real wage growth and consumer spending continued at a sluggish pace, which is likely to undermine overall GDP growth. Forecasts have been scaled down to below 1% in 2015 and only slightly better at 1.5% next year and going into 2017.
China and India. China’s near-term economic prospects have been compromised by the financial market volatility and uncertainty. Following a rise of more than 150% during the preceding 12 months, the Shanghai and Shenzhen stock exchanges have fallen 30-40% during the past 4-6 weeks as overvalued share prices adjusted to reflect a struggling underlying economy. Real GDP growth has tapered off to 5.3% during the first quarter. The government is intervening aggressively both in attempting to stabilise the stock market fall and in stimulating the real economy. The forecast growth rates for this economy remain around 6-7% per annum. Following democratic elections in India in May 2014, the economic outlook for the country has brightened. Forecast growth rates are currently poised to surpass that of the emerging market growth leader, i.e. China. Both the IMF and some private sector forecasters see growth averaging around 7-8% in India, short term.
Other emerging economies. Growth forecasts for the emerging market universe are being scaled down over the near term, albeit that this slowdown is expected to reach a bottom this year/next year and the underlying economies re-accelerating in 2016/17. Tighter financial conditions (due to capital flight) and lower commodity prices (including that of oil compared to year-ago levels) and structural impediments in some economies (e.g. in Latin America), as well as geo-political upheaval (CIS, Middle East & Africa) are factors inhibiting growth. Growth performances are coming in below trend from being above trend during the preceding 10-odd years.
Overall emerging market real economic growth is projected at 4-4.5% in 2015, re-accelerating to 4.5-5% in 2016 and going into 2017.
Pieter Laubscher
24 July 2015