Global Economy Keeps Slowing Down

4 may 2016

The Analytical Center's experts note a slowing down in the global GDP growth in Q1 2016. Read about this and other trends in the global economy in the new bulletin titled Taking the Pulse: Oil Exporters Fail to Agree Production Freeze. In Focus: Ukrainian Economy during Government Changeover.

In early Q2, industrial production in key economies of the world kept slowing down. Thus, in the US the rate of decline in output (with a strong dollar) picked up pace again, reaching negative 2% in March on an annualized basis. In the meantime, production in Japan and Russia continued to fall as well, even though the rate of decline slowed down somewhat to negative 1.6% and negative 0.5% respectively. In the meantime, China saw its output growth pick up pace to 6.8% on an annualized basis in March, which was the highest increase in the past three quarters.

April 17, oil exporters met in Doha and said they were not going to freeze production of oil. It is highly likely, however, that the very fact that the negotiations took place probably would have put the brakes on the shorting of oil futures in the markets. If oil exporters manage to refrain from competing on production, an equilibrium between supply and demand can emerge within six months.

The bulletin notes that the stabilization of the global economy is helping the Russian ruble regain some of the value it lost earlier. The strengthening of the ruble drove the USD to RUB exchange rate to 65-66 in mid-April. It was the lowest rate since Nov 2015. The RUB to EUR exchange rate is fluctuating between 74 and 75, a corridor that previously was only seen in early Dec 2015.

The political tensions in Brazil keep rising but the national currency is appreciating. The lowest BRL to USD exchange rate in April was 3.5. In March, Brazil slashed rates on its 10-year bonds, which can be interpreted as a sign of economic stabilization. At the same time, it is too early to talk about a full-blown recovery yet: the unstable political situation may set off a new wave of the crisis.

The tense political situation in the world (conflicts and sanctions) is holding back economic growth, creating uncertainty for companies and investors alike and forcing them to emphasize short term planning and investment projects with short payback periods. The uncertainty about the future can best be seen in the unusually long credit crunch that started after the 2008-2009 crisis and is still ongoing. Despite textbook logic, low interest rates on loans are not bringing about large-scale investments. Excessive banking regulation, depressing political environment and uncertainty about structural changes are holding investors back. By 2015, the situation was made even worse as Russia and Brazil went into a recession, China’s growth started slowing down and oil exporting nations saw their imports begin to shrink. There is a threat of a global depression and traditional tools for whipping the economy into shape (low interest rates) still are not working.

And while falling prices of commodities are a good thing for major industrial consumers, they have also put the economies of some countries in a very tight spot while local crises and stock market upheavals in some countries are adding insult to injury on the global scale as well. Normally global economic collapses are preceded by investment frenzies, credit booms and general overheating of the economy. However, this time around we are seeing uneven growth, stagnation in a number of sectors, budget and debt problems, deflationary trends and a ‘depression in the heads.’ Military spending is rising as are losses from poor coordination at the international level.

The global economy is suffering from currency wars, geopolitical conflicts and falling trade while individual countries are increasingly resorting to protectionist measures, says an IMF report. As for Russia, the IMF has revised down its forecast, now the projected GDP growth in 2016 is negative 1.8% and in 2017 it is expected to be +0.8%.

Ukraine’s new government is taking the helm as real GDP fell by 16% in 2014-2015 (on 2013), consumption is down 22%, including household consumption being down by 28% while state spending is up 1.6% and capital investments are down 30%.

Several consecutive depreciations of the national currency have resulted in an UAH to USD exchange rate that is 3.1 times lower in Q1 2016 than what it was in Q4 2013, while consumer prices went up 81% in the same period. International experts mostly view the change of government as a necessary step as the outgoing cabinet had very little support because of alleged corruption and on account that it was dragging its feet with reforms. A different explanation is also possible: as the country transitions from conflict towards a more stable situation that can serve as a foundation for an economic recovery, more precisely as it transitions from war to peace. Analytical Center experts regard this factor only from the economic viewpoint: it would be unreasonable to expect a revival of saving, especially by households, as acute political uncertainty persists.

In 2015, industrial output in Ukraine was a third less than in 2007, metal production and mechanical engineering were 50% down on 2007, meaning that complex sectors are facing the most severe difficulties. But even food production fell to 86% of the 2007 level. At the same time the role of the aid provided by the EU and the IMF is proving far more significant than for other countries and will be of paramount importance for Ukraine’s government. In the fall of 2015 the IMF was optimistic in its predictions that Ukraine’s economy would achieve 4% GDP growth in 2018, but in the latest revision of its forecast for Ukraine, the IMF expects its economy to begin growing at a rate of at least 4% only in 2020-2021.

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