The New Economics Foundation (NEF) produce a weekly economics briefing. This week they look at the state of the global economy, with the economic slowdown in China likely to hold down global growth in 2016. To read more from NEF visit their website
* Falling stock markets, low commodity prices, risks of debt crises in developing countries and persistently near-zero inflation have so far dominated this year’s headlines. Some banks are even recommending investors sell everything other than “safe” (usually government) bonds; meanwhile Chancellor George Osborne has talked about a “cocktail of [global] threats” to the UK economy.
* Both the IMF and the World Bank have revised their global growth expectations downwards for this year. In 2015, the global economy grew slower than any other year since 2009; 2016 will be even slower, and this will particularly affect developing countries – which need GDP growth to increase living standards.
* Most of the economic press presents these issues as separate risks. It is worth asking whether it is possible to connect the dots between these different risks.
THE main reason for slow global growth in 2016 will be China. After 2008, with less demand for its exports in crisis-ridden developed countries (most notably the US), China attempted to rebalance its economy.
It tried to compensate for reduced export revenue by inciting massive domestic investments and increasing domestic consumption. For a few years, this strategy seemed to work, but this is not the case anymore – it resulted in the creation of domestic bubbles (notably in the real estate), which are now bursting.
As a consequence of its slowdown, China is importing less material and commodities from other developing countries. This is why the price of these commodities is shrinking: there is too much supply and not enough demand to meet it.
“For a few years, [China’s] strategy seemed to work, but this is not the case anymore – it resulted in the creation of domestic bubbles (notably in the real estate), which are now bursting.”
Parts of the developing world that specialised in exporting commodities to China are now experiencing a reduction of export revenue, which also affects their public finances. As a result many Latin American countries (including the biggest one, Brazil) are either in outright recession or stagnating. The same applies for some African and Asian countries.
At the same time, OPEC’s decision to flood the world with cheap oil (an attempt to kill the US shale industry) has also reduced oil exports revenue for some developing countries – such as Saudi Arabia, Russia, Venezuela and even Brazil or Colombia. For example, Russia is on the edge of recession while Venezuela’s economy contracted by 10 per cent in 2015.
Finally, many European economies are still fragile, as the Eurozone remains a deficient currency union, incapable of addressing its imbalances. The Eurozone as a whole grew by only 0.3 per cent in the last quarter of 2015, with Finland, Italy and Greece posting a negative growth rate and Portugal and France virtually stagnating.
“Many European economies are still fragile, as the Eurozone remains a deficient currency union, incapable of addressing its imbalances.”
The combination of all these factors means there is insufficient global demand (consumer spending) for global production to keep increasing at the same pace. With real wages stagnant, or in some cases even decreasing, governments sticking to contractionary austerity in the Western world and the Chinese economy slowing down, the main source of demand is currently coming from US and UK private sectors: where consumption is kept afloat through private sector (including household) debt.
But even if these countries keep consuming more than they produce by running massive current account and trade deficits, this is not enough to keep global production going – at least at the current levels.
What does all this mean for 2016?
* We may see multiple crises emerging in parts of the developing world. This will also affect the financial systems of developed countries, which have been lending money to developing ones. For example, the UK and US financial sectors are exposed to China and Latin America, respectively.
* A lack of global demand, and therefore decline in production, will affect investor’s behaviour – and in turn the stock markets. The slowing of global production and trade will put into doubt the profitability of many economic activities. This is why financial sector analysts are so nervous: they fear that many of the assets they hold (e.g. stocks and bonds) are overvalued – and have already started getting rid of them.
* With near-zero inflation in the developed world, reductions of commodity and oil prices are likely to push some countries into deflation. While deflation may be good news in the short run, it is definitely not in the medium term, as it may jeopardize fragile post-2008 recoveries. Deflation is notably bad news for countries with high levels of private and public debt – particularly in the Eurozone’s periphery: it may indeed translate into reduced national income from which to repay those debts.
Although it is impossible to predict whether 2016 will see a replay of a 2008-like crisis, one thing is certain: the shockwaves of 2008 are still with us and little has been done to address the fundamental imbalances which caused the economic crisis in the first place.