A shaky start to 2016

22 Jan 2016

Tags

  • Mark Thirlwell
  • Global Value Chains
  • International Trade
  • World Economy

The world economy has had a pretty shaky start to 2016, with share markets suffering their worst start to a year on record. Investors are worried about a surfeit of risks including uncertainties regarding China’s growth performance and the future trajectory of the RMB, the implications of slumping commodity prices, the durability of the US economic recovery, and the resilience of emerging market economies to the preceding factors along with the change in global monetary and credit conditions prompted by the Fed’s December rate hike. Plus, there’s also an unpleasant cocktail of geopolitical dangers and uncertainties.

As is usually the case, official forecasters are somewhat more sanguine than jumpy financial market participants. For example, when the IMF released the January update to its flagship World Economic Outlook (WEO) a few days ago, in the accompanying press conference Maurice Obstfeld, the Fund’s Economic Counsellor and Director of Research suggested that at least some of the current doom and gloom might be overdone, saying that investors ‘may be reacting very strongly to rather small bits of evidence in an environment of heightened volatility and risk aversion . . . we don't see some of the extreme downside scenarios that the market seems to be keying off of.’ Consistent with this view, in its latest cut of the WEO the Fund continues to expect a modest improvement in the global economy this year, with growth predicted to pick up slightly from an estimated 3.1 per cent last year to 3.4 per cent in 2016 and 3.6 per cent next year. 1

World read GDP growth 2000-2016F

The IMF’s central case forecast is still built around the same basic story of a gradual (and ‘modest and uneven’) recovery in advanced economies combined with a ‘challenging’ outlook for many emerging and developing economies.

Notably, the decline in emerging market growth performance means that the ‘growth gap’ between advanced economies on the one hand and emerging economies on the other is expected by the IMF to continue to be much narrower than has been the case for most of the first decade of the current century.

The growth gap 1980-2017F

Still, while the latest IMF forecast still sees a gradual improvement in global growth over the next two years, it’s also the case that the Fund has cut its GDP projections for both 2016 and 2017 by 0.2 percentage points relative to the October 2015 WEO. Likewise, it concedes that ‘risks to the global outlook remain tilted to the downside’, citing many of the same factors that are concerning market participants at the moment.

Unsurprisingly, given this global growth backdrop, the IMF’s outlook for international trade is also fairly subdued, with world trade volumes (goods and services) now estimated to have grown by just 2.6 per cent in 2015, and only forecast to rise by a modest 3.4 per cent this year and 4.1 per cent next year.

Growth in world trade volumes (goods and services) 2000-2020F

Again, these numbers embody cuts of 0.7 percentage points to the forecast for 2016 and 0.5 percentage points for 2017 relative to the October 2015 WEO. And the estimate for actual 2015 trade growth has also been cut by 0.6 percentage points. As I’ve noted before, the Fund’s forecasts for world trade growth have been the subject of serial downgrades in recent years, as trade flows have turned out to be consistently weaker than expected.

IMF estimates for growth in world trade volumes (goods and services)

This ongoing weakness in world trade is the subject of some interesting analysis in the World Bank’s latest Global Economic Prospects, which was also released earlier this month. According to the Bank, a large part of the 2015 downturn in trade reflected a big drop in import demand from emerging and developing economies that has been large enough to more than offset a smaller recovery in US and Eurozone import demand. The Bank reckons that this decline in the demand for imports has largely been driven by four factors:

  1. Recessions in Brazil and Russia, both of which are linked to a broader decline in economic activity (and hence demand for imports) across emerging and developing country commodity producers as a consequence of the current collapse in commodity prices;
  2. A rebalancing of Chinese growth away from trade-intensive investment towards less trade-intensive consumption and services;
  3. Real exchange rate depreciations that (to date at least) have been more associated with a decline in imports than an increase in exports; and
  4. A slowdown in the pace of integration of global value chains (GVCs), with those manufacturing sectors most associated with GVCs also those which have seen the biggest deceleration in trade growth.

Finally, the Bank also notes that one way to reinvigorate global trade growth would be to press ahead with more international trade liberalisation. In this context, it presents some recent work on the Trans-Pacific Partnership (TPP) suggesting that the TPP could boost member economies’ trade by 11 per cent by 2030. That in turn would provide a helpful boost to regional trade growth across the TPP, which according to the Bank has slowed from an average growth rate of about ten per cent over 1990-2007 to just five per cent over the 2010-14 period.

1At purchasing power parity exchange rates. At market (US dollar) exchange rates, the IMF has global GDP growth increasing from 2.5 per cent in 2015 to 2.7 per cent in 2016 and three per cent in 2017.