Global Economy 2016: Fragility in US and China dims optimism
Global Economy 2016: Poor manufacturing and construction data published in the US Monday which followed reports from China of a continuing shrinkage in factory activity, triggered sharp cuts in forecasts for US fourth quarter GDP (gross domestic product). JPMorgan Chase analysts warned that the US economy is becoming "more vulnerable" and faces an increased risk of recession.
Global manufacturing growth slowed at the end of 2015, ending the worst year since 2012. European countries led the growth rankings, based on PMI (purchasing managers' index) data produced by Markit, as emerging Asia suffered its worst downturn in more than ten years of data collection.
The JPMorgan Global Manufacturing PMI, fell from 51.2 in November to 50.9 in December, its lowest reading for three months. Markit said the survey data are consistent with global manufacturing output expanding at a modest annual pace of just over 1%.
Last Friday the South Korean trade ministry reported that exports declined 13.8% year over year in December, a 12th-consecutive monthly fall. Imports tumbled 19.2%. For the full year of 2015, exports contracted 7.9%, the steepest decline since the global financial crisis hit Korea's trade in 2009 and the first annual contraction in three years.
A decline in the value of Korean oil-refinery goods is a factor but Korea is viewed as a bellwether because of its wide range of exports from smartphones to ships.
“By destination, exports to all major markets fell,” Barclays's Wai Ho Leong and Angela Hsieh commented. “All in, we think the underlying trend of a challenging external environment will likely extend into 2016.”
CNBC reports that the Dow Jones industrial average closed about 275 points lower Monday. The index closed off 1.58%, for its worst start to the year since 2 Jan, 2008, when the Dow fell 1.66%.
The Federal Reserve Bank of Atlanta said Monday it now estimates that fourth quarter GDP grew at just a 0.7% annualised pace, down from a prior estimate of 1.3% growth. JP Morgan Chase cut its estimate in half to 1% growth from 2%. Forecasting firm Macroeconomic Advisers lowered its estimate by three-tenths of a percentage point to 1.1%.
JPMorgan analysts speculated last week that there is a three-in-four chance that there will be a US recession in the next three years:
Our models suggest that US recession risks over a two- to three-year horizon have increased materially as a result of weak supply-side performance. US expansions don’t die of old age, but an environment of tight labor markets amid weak productivity gains and limited global pricing power signals that the expansion is becoming more vulnerable.
The Wall Street Journal said Monday:
The economy has been getting key support by consumers, who have been snapping up cars, shelling out more at restaurants, and, until recently, stepping up home purchases. But persistent weakness in the global economy and the domestic energy sector have been cutting into demand at American factories. The latest manufacturing numbers are stoking concerns that global weakness could weigh even further on the US economy in 2016.
In a guest article published last Wednesday in Handelsblatt, the German newspaper, Christine Lagarde, IMF managing director, warned that the growth in global trade has slowed sharply and a decline in raw material prices is posing problems for economies reliant on commodities, while the financial sector in many countries has remaining weaknesses while financial risks are rising in emerging markets:
All of that means global growth will be disappointing and uneven in 2016.
Lagarde said there are "potential spillover effects," with the prospect of increasing interest rates there already having contributed to higher financing costs for some borrowers, including in emerging and developing markets.
Most highly developed economies except the US and possibly Britain will continue to need loose monetary policy but all countries in this category should comprehensively factor spillover effects into their decision making,
Global economic momentum is expected to remain subdued in 2016 and despite the Federal Reserve's first interest rate hike in 9 years last month, central banks will continue to provide liquidity. Global growth looks set to remain uneven in 2016, at 3.3% (2015: 3.1%), according to Deutsche Bank economists.
Maurice Obstfeld, IMF chief economist, said in a Fund interview Monday:
Emerging and developing economies should be an even more intense focus of research. During the 1980s, emerging and developing economies accounted for around 36% of global GDP (measured in purchasing power parity, or PPP, terms) and some 43% of global GDP growth (with PPP weights). For 2010-2015, the numbers were 56% and 79%, respectively. So a predominantly advanced-economy lens for viewing the world economy has become ever more outmoded. That research agenda for emerging and developing economies comprises classic issues related to the balance of payments — capital flows and their management, foreign exchange intervention, vulnerabilities in external balance sheets, and the determinants of current account balances, trade patterns, and trade volumes.
But there are many additional questions. What policies and policy frameworks are most conducive to higher potential output and its growth? Potential GDP growth seems to have declined throughout the world, as noted in past editions of the World Economic Outlook (WEO), but the reasons are not well understood. The April 2016 WEO will look at advanced-economy structural reforms in that context.
Trends in inequality also warrant attention. Despite considerable global convergence in national per capita incomes, a more equitable income distribution within countries has not necessarily followed. This inequality has implications for overall economic productivity (for example, through health outcomes) and for the political sustainability of market-friendly policies. How can growth be made more inclusive, and how might that, in turn, support higher growth?
Beyond these longer-term questions of growth and distribution, there are many economic stability issues calling for attention. For example, looking broadly across all economies, integration of the financial sector into our macro-policy frameworks remains an urgent research priority.
John Authers analyses a hectic start to 2016, as Chinese stocks sell off, an impending leadership change in the US, and European manufacturers appear to gear for growth.