WEEKLY COMMENT 8-10-2015
By Barry Edwards
World Economic Outlook
The International Monetary Fund (IMF) have published their quarterly October 2015 World Economic Outlook entitled ‘adjusting to lower commodity prices’ which is forecasting lower world trade growth than predicted three months ago. The brief summary is below;
“Global growth for 2015 is projected at 3.1 percent, 0.3 percentage point lower than in 2014, and 0.2 percentage point below the forecasts in the July 2015 World Economic Outlook (WEO) Update. Prospects across the main countries and regions remain uneven. Relative to last year, the recovery in advanced economies is expected to pick up slightly, while activity in emerging market and developing economies is projected to slow for the fifth year in a row, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries. In an environment of declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging market and developing economies.”
If you would like to read the report click on the link below; it has 230 pages but it is well worth reading the foreword and executive summary which is only five pages.
The risks and the economic policy priority are summarised below;
“The main medium-term risk for advanced economies is a further decline of already-low growth into near stagnation, particularly if global demand falters further as prospects weaken for emerging market and developing economies. In this context, persistently below-target inflation could become more entrenched. In emerging markets, medium-term risks come from spillovers from a “hard landing” or much slower potential growth in China, or lower potential growth more generally. Raising both actual and potential output through a combination of demand support and structural reforms continues to be the economic policy priority. In advanced economies, accommodative monetary policy remains essential, alongside macroprudential policies to contain financial sector risks as needed.”
This report has stimulated many commentators to make their own predictions for the world economy which are much more pessimistic than the IMF. Some are predicting that we are heading for a world recession in 2016 while others believe that growth will decrease more than the IMF are forecasting causing major upsets in the emerging markets. The serious doubts about the Chinese economy seem to have moderated for the time being, it is mainly the commodity exporting countries that are causing greatest concern.
The main point that everyone seems to agree upon is that the world economy is about to experience lower growth and possible financial shocks over the next eighteen months. Interest rates are expected to remain low and the IMF are suggesting that the Federal Reserve (the American central bank) should not increase rates as they have said they are likely to do by the end of the year. Most fund managers believe that stock markets are either over valued or fully valued in the developed countries and expect further declines in the emerging markets. Investors are finding it very difficult to see value in any asset at the moment and many are buying short term government bonds to earn some small amount of income and protect capital value.
Corporate capital expenditure is not increasing at the rate that most governments would like to see although consumer spending is starting to improve in developed countries, especially the USA and UK. Overall a very mixed outlook is what most commentators see for the medium term with some believing that trouble lies ahead.
The problem is that the central banks are coming to the end of their reign as managers and guardians of financial system because the controls at their disposal have been fully utilised leaving any further stimulus in the hands of governments and fiscal policy. The IMF are proposing that governments start spending on infrastructure and keep implementing structural reforms to remove the restraints on growth that stifle many businesses in some countries around the world.
Some commentators believe that a new approach to manging economies must be adopted but there is very little detail showing how this can be done. Technology has brought the people of the world and countries much closer together but it has not yet unleashed the solution to stimulate a new age of growth that can be defined precisely for businesses to react and invest in to make that happen. New innovations and ideas are evolving all the time at an unprecedented pace but they take years to develop and get accepted by consumers.
The answer to the problems the world is experiencing right now may well appear from an unexpected source but at the moment there is no particular sign as to what that might be. Somehow these problems do get resolved but what we all have to experience before that happens is the concern for most people.
That’s all for this week, more observations next week.