Current economic situation unsatisfactory
As we consider the world economic outlook, the fact is that the growth slowdown, which became more prominent towards the end of last year, continued during April 2016. Amidst some regional variances, the global industrial sector has all but grinded to a halt. The global services sector is still expanding; however, the composite global services PMI (51.6) remained well below its long-term average (53.8) in April.
Both developed and developing countries experience this slowdown in the industrial sector and sluggish growth in services at the present point in time. The IMF has again cut its short-term forecast for global growth by 0.2 percentage points, following a similar decision in January[1]. A key worrying global development is the slackening of trade volume growth across both developed and developing countries.
Short-term recovery, but 5-year outlook will be capped
Generally analysts do not fear a recession over the short term. Macro-economic conditions are stable and expectations for some acceleration in the growth momentum remain. However, the medium-term factors and other longer-term mega trends highlighted previously that are likely to constrain world economic growth are increasingly evident in their impact. This update briefly revisits these by way of background to our (slightly) revised medium-term forecast for the world economy.
Considering the 5-year outlook one should not expect a robust acceleration of economic activity in the developed economies, similar to the period preceding the Great Recession. Trend growth in these economies has generally been adjusted downwards. Developed country public debt levels are projected to remain elevated by 2020, despite tight reigns over fiscal policy. Adverse demographics will be worse by 2020 compared to 2015. The dramatic slowdown in trend productivity growth in the major advanced economies (USA in particular) is likely to persist by 2020, bar some unforeseen technological breakthrough. Even in such an event, long gestation periods are typically involved.
Secondly, whereas some large emerging economies like Brazil and Russia currently mired in deep recession, are expected to recover and lift growth in the emerging market universe over the short- to medium, others won’t. The oil exporting economies and those commodity exporters hit by weak commodity prices and tightened financial conditions (as US interest rates rise) are likely to find the going equally tough by 2020.
The re-balancing of the Chinese economy is a long-term project. While the Chinese authorities are reverting to big infrastructure spending as a means to support growth around a 6-7% level, the industrial sector continues to shrink/stagnate. Old-style infrastructure investment (funded by increased debt) and exports (stimulated through currency devaluations) as avenues to stimulate growth are unsustainable over the medium term and contradict efforts to re-balance the economy.
While these efforts may pay-off in terms of underpinning growth in China; the commodity intensity of the growth will continue to change. Therefore, the general medium-term outlook for commodity prices remains muted given China’s dominating influence in commodity markets. At best one should expect prices of key hard commodities (e.g. iron ore, steel, manganese, copper, aluminum, etc.) to bottom-out and only rise moderately by 2020/1. The rise in oil prices is also likely to be capped by the shale-oil supply from the USA and Canada (and elsewhere by 2021?).
Green shoots of recovery
According to the IMF, global real GDP growth averaged 2.8% per annum over the 2010-15 period. From a medium-term perspective one should expect more of the same over the next five years. However, the near term may look different as green shoots of recovery are emerging in some regions.
Euro area. The Euro area growth momentum is forecast to pick up from 0.8% per annum (2010-15) to 1.8% per annum (2016-21). First quarter 2016 growth came in at a surprising 2.2% annualised. The transmission of the stimulatory macro-economic policies to the real economy appears to be gaining traction, reflected, inter alia, in rising confidence levels; and the worst of fiscal austerity is also behind us. Economies such as Germany, Italy, Spain and Ireland seem to spearhead the improvement; others (notably France) remain stuck. Do not expect fireworks, but coming from a weak spot the past five years, the medium-term outlook is one of a material improvement. The refugee crisis and possibility of Brexit are dark clouds over the European forecast horison.
USA. The US economy was much faster out of the starting blocks in the wake of the 2009 recession compared to the Euro area and Japan, with growth averaging 2.1% per annum (2010-15). However, the medium-term outlook is for a similar rate of growth, if slightly faster, i.e. 2.2% per annum (2016-21). While the industrial sector slowdown is somewhat ominous, inventories have been paired down, the consumer is resilient and industrial production is expected to revive over the short term. Medium-term, policy will remain accommodative (read: some fiscal easing and slow and mild increases in interest rates).
China. The re-balancing of the economy has seen the 5-year average growth momentum (8.3%, 2010-15) slip to a medium-term outlook in the 5-6% range, i.e. 2016-21. This average growth rate remains elevated and its achievement will be dependent upon continuous macro-economic policy support.
Japan. The three arrows of Abeconomics are failing. Monetary and fiscal policies have at best increased GDP growth temporarily (1.8% per annum, 2010-13); however, the third arrow – or structural reform – is not effectively being implemented. A planned VAT increase can cause more damage next year. The medium-term forecast (0.6% per annum, 2016-21) is in line with Japan’s economic growth performance over the period since 2000.
Emerging economies. The outlook for the Indian economy appears rosy. Medium term growth is projected to pick up from 7.3% per annum (2010-15) to 7.6% (2016-21). However, provided the slowdown in rapid Chinese growth continues, the 5-year real GDP growth rate for emerging economies is projected to recede from 5.4% per annum (2010-15) to 4.7% (2016-21). Economic recoveries in Brazil (only next year) and Russia (this year) will support growth in the emerging market universe. Resilience in key emerging economies (such as India, Mexico, Poland, Indonesia and other East Asian emerging economies) will also be supportive of growth. The laggards are likely to be the oil- and commodity exporting developing countries and those dependent on external finance.
Pieter Laubscher
20 April 2016
[1] These revisions seem insignificant in the greater scheme of things; however they cut a cool $350 billion from global GDP, i.e. R5.3 trillion (or 130% of the size of the SA economy in 2015 at current market exchange rates). This is the anticipated quantum of the reduction in nominal wages and profits circulating globally.