Global Economic Situation Remains Tense

2 march 2016

The Analytical Center has published its new Bulletin covering current trends in global economy. Experts claim that the overall economic situation remains tense. Many current conflicts and sanctions in effect further aggravate the difficult period globally. Instead of focusing on the 2030 UN Sustainable Development Goals and tackling climate change, politicians and organizations are busy fighting terrorism and migrant crises amid general confidence decline on the international arena.

The collapse of oil prices and the economic recession in Russia and Brazil resulted in a global trade slowdown. This is covered in full in the Bulletin “On the Pulse: Four Oil Producers Calling to Freeze Oil Output. Focus on Economic Recession in Brazil — a Threat to Long-Term Development”.

The expectations nurtured by many politicians and economists alike to the effect that the oil exporting countries will resolve to cut oil production have so far manifested themselves only in a declaration by four oil-producing countries (Russia, Saudi Arabia, Venezuela and Qatar), but there can be more action to follow. It seems like an effect of the reduction of the global energy firms’ investments into oil production, as well as of the certain oil production cut in 2026, is what is universally expected.

The authors of the Bulletin note that in this complicated context, of special interest to both analysts and politicians is the unexpectedly sharp economic recession in Brazil — nothing of the kind has been observed since the 1980s. It should be made clear from the start that this recession is due to domestic factors resulting from a combination of hardships with which the country’s development is attended (average development level trap), the complex macroeconomic situation and the aggravation of a number of social and political problems that stand in the way of some important (yet highly unpopular) decisions in budgetary policies.

Brazil is one of the countries that are closest to Russia in terms of size, the availability of natural resources, development index and many other disparity indicators: social and regional alike. The country made a vast step forward in its development since the turn of the millennium, consolidating its success in overcoming such long-lasting problems as dictatorship, hyperinflation, and mass poverty. Stable democracy, the growing middle class, the macroeconomic stabilization and the fast growth have until recently been creating hopes for a new breakthrough in the country’s development. It is, however, clear now that the GDP decline by 3.8% in 2015 and the expected further decline in 2016 (again very similar to what Russia is experiencing) have serious causes behind and will require major effort to overcome. It is in the context of all of this that Brazil is going to host the Olympic Games in the summer of 2016.

The Doha declaration of four oil-producing countries, among them Russia and Saudi Arabia, on agreement to freeze oil output at January 2016 levels (which are high as they are) has somewhat helped to prop up the oil prices, proving to markets that there is a limit to both fall in prices and the reluctance to act on the part of the exporters. But at the same time, following the sanctions' relief in mid-January, Iran resumed the export of its oil into Europe, and the US first exported shipments of its crude oil after the Congress lifted the export ban, which will both contribute to the downward pressure on prices.

The Russian ruble demonstrated high volatility in the early 2016: opening the year at a rate of 72.9 rubles to dollar, it then fell down to 83.6 rubles to dollar by January 22; the 1st February rate was 75.2 rubles to dollar, and presently continues to drop due to reassuring news of the oil output freeze.

During the first decade of February 2016 euro has gained substantially to dollar, rising from 1.08 to 1.13 dollars to euro. The Japanese yen was one currency to gain the most since the year began — almost 5.5% over 1.5 months. The yuan has recovered its January losses, returning to 6.5 yuan to dollar. Following a period of falling in the summer and fall of 2015, the Brazilian real has shown notable stability in the past few months.

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