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Global Growth Remains Weak

02 February 2016 09:39

Uncertainty around short-term growth drivers is undermining the global outlook, with headwinds due to outweigh tailwinds over Q3-Q4. Falling corporate profits in the US, and deepening Chinese producer price deflation, along with the clear dependence of the euro zone and Japan on quantitative easing, indicate that global growth in 2015 is likely to be around the weak 2.6 level achieved in 2014. India is forecast to grow at 8.4, the highest level since the global recession, but its new GDP methodology is unproven and its growth does not translate much into global demand. 

Mixed recent data means that the debate over the timing and pace of US interest rate rises still weighs on markets. Although our core scenario is still for a September 2015 Fed rate rise, to 0.25, a lack of decisive economic data could see this first step being put back until December. Moreover, despite official protestations to the contrary, a Greek exit from European monetary union is looking more probable; and the US Treasury is nervous that the ECB and member states are more focused on exerting discipline on Athens than averting a financial shock. Markets are not necessarily pricing in how new waves of ‘Grexit’ anticipation could affect Spain, Portugal and Italy. Finally, the strong US dollar is adding to the volatility in the currency, capital and commodity markets. 

Key Risk:  No Breakthrough Back to Normality in the US or Elsewhere?

In the Keynesian business cycle, when output reaches the limits of the stock of capital and labour, inflation ensues. However, the upturn of a business cycle can end even in the absence of inflation; if the boom was only powerful enough to spur producer price inflation, it can end before it brings broad-based consumer price inflation. The return of broad-based inflation sufficient to force the string of rate rises the consensus expects is accordingly not guaranteed. Many fret over the impacts of higher interest rates on the global financial system given the extent to which financial stability has come to depend on minimal benchmark bond yields. But given central banks’ caution, it seems unlikely that rates will rise faster than the world can bear. The more disconcerting outcome will be if there is no decisive switch back to the familiar world of non-zero interest rates. 

Household savers and key parts of the financial system, pension funds and insurance companies, have put up with the ‘financial repression’ of low rates for years, but if they continue, privileging debtors and holders of risk assets, the wilting ‘new normal’ could become more contentious and divisive for OECD policy-makers, business and voters. 

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Ruby Tang

Ruby Tang's Profile

Head of Risk Management Solutions and Sales & Marketing Solutions, Dun & Bradstreet (HK) Ltd

Ruby is a veteran in the Business Information Industry with over 15 years of experience. She has a rich background in risk assessment and sales &...