Global Economic Outlook - May 2016

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31st May 2016

The turbulent waters that the global economy faced at the beginning of the year have calmed but the underlying issues persist.

Slower for longer


A shot in the arm’, she called it. Ms Christine Lagarde, the IMF Managing Director, sighed with relief when the oil price plummeted in late 2014 and it became clear that it would remain low. It was a powerful metaphor: the ailing patient – the world economy – would get precisely what it needed to get back on its feet.

It seemed a no brainer – it is the opposite of what occurred during the two oil crises that hit the world economy in the 1970s. Back then, the oil price ran up rapidly, causing aggregate demand to drop. Additional spending in the oil-exporting countries was way behind the forced lower spending in the importing countries. Therefore, a lower oil price would simply do the reverse: boost aggregate demand and increase spending in importing countries – right?

Two years after the oil price drop, the patient is still ill and, worse yet, the prognosis is still changing. The doctors are finally admitting that this symmetrical reasoning does not actually provide the best basis for finding a cure. Additional spending in oil-importing countries is at best lagging the spending cuts in the oil-exporting countries. At this point, the oil price seems to have already bottomed out and the possible benefits of the ‘shot in the arm’ already start to fade.

What now? The medical toolkit is nearly used up. Monetary policy has kept the patient alive during the most critical periods, but it has reached its limits. Interest rates are so low that cash
hoarding is a realistic threat, robbing the instrument of its effectiveness. Fiscal policy seems a natural option now that the government can borrow for nearly free or even receive a small fee. But this instrument is constrained by high public debt and a blatant lack of political willingness. It seems like stagnation will simply have to run its course and the patient will have to cure
In this edition of the Atradius Economic Outlook, we provide our own examination of the health of the global economy and what symptoms it needs to watch out for in the coming year to
ensure its (very gradual) recovery. In this environment, it is clear that default risks for businesses are on the rise. Indeed this is what investors’ risk aversion indicators suggest, as
well as the credit conditions for firms in emerging market economies. Insolvencies are expected to rise, especially in China, Brazil and Russia. The drag on global growth that this
causes is the primary reason that little to no change is forecast across most advanced economies. Some major economies are finally seeing business failures dip below pre-crisis levels, but a faint relief to the patient it may be.
John Lorié, Chief Economist Atradius

Executive summary

The turbulent waters that the global economy faced at the beginning of the year have calmed but the underlying issues persist and the world is facing another year of sluggish growth. With more uncertainty in emerging markets and failure to find the cure for stagnation in advanced economies, it appears the world economy will continue slower for longer.

Key points:

  • Global economic growth is expected to slow to 2.4% in 2016, down from 2.6% last year. In 2017, a slight pick-up to 2.8% is anticipated. 
  • The economic recovery in advanced markets, while steady, is still fragile. Forecasts for both the eurozone and US have been revised down since the last Outlook. In 2016, the eurozone is forecast to expand only 1.5% while the US will slow down to 2.0% growth. 
  • Another contraction of -0.6% is forecast in Latin America while Eastern Europe continues its recovery with 1.1% growth this year. Emerging Asia will experience the most rapid growth in 2016 with a 5.6% expansion. 
  • The global business environment has weakened. Atradius forecasts zero change in insolvencies across advanced economies while increases are forecast in major emerging markets.

A significant boost to global growth still has not come, and we are faced with another year of slow growth with high risks. In Chapter 1, reasons for the disappointing outlook are addressed. Most important are deleveraging (or lack thereof), the limitations of non-conventional monetary policy and the inability to implement effective fiscal policy. Low commodity prices are still not providing a boost to the global economy and world trade continues to hold back growth. Atradius forecasts world trade growth to be flat at 2.5% in 2016.

The most important risks to the outlook remain the slowdown in China and the misguided US monetary policy. The probability of both issues is low but the impact would be large and on a global scale, especially on capital flows, currencies, and external corporate debt in emerging markets.

Advanced economies, discussed in Chapter 2, are still enjoying demand-driven recoveries, however the negative impact of slower growth in emerging markets and external demand for exports has had a negative effect on growth. Most eurozone countries are expected to see modest growth in 2016 but crisis legacies, especially within the banking sector, are still clouding the outlook. Previously solid growth in the US has been challenged by lower exports and falling investment in the oil and gas sector. The UK is facing headwinds related to uncertainty over the upcoming EU-membership referendum.

Chapter 3 presents the latest developments and annual outlook for a range of emerging markets. Growth is forecast to slow to the lowest pace since the global crisis. Some common obstacles facing emerging markets are low commodity prices, US monetary policy normalisation, geopolitical tensions and capital outflows.

These rather negative economic developments are reflected in Atradius’ insolvency forecasts, presented in Chapter 4. After a 7% decline in insolvencies across advanced markets in 2015, zero change is forecast this year, the worst performance since the 30% increase in 2009. The eurozone as a whole is forecast to see only a 2% decrease in bankruptcies while slight increases of 2% are now forecast in both the US and UK. Debt overhang is straining businesses in the eurozone periphery while low commodity prices are continuing to challenge the business environments in the US, Australia and Canada. Commodity prices are especially dire for many emerging markets, like Russia and Brazil which are forecast to see a strong rise in insolvencies this year, exacerbated by unstable politics. If global growth continues ‘slower for longer’, the insolvency environment will become increasingly difficult.

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