Introduction Global Economic Outlook, Q3 2015

In the third-quarter outlook for the global economy, Deloitte’s far-flung economists offer their views on the economic situation and the outlook for the near and longer term.

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As we go to press with the third-quarter outlook for the global economy, it must be noted that events are happening that are in flux and might change considerably in the days and weeks ahead. These include Greece’s role in the Eurozone, asset market conditions in China, the price of oil, the values of major currencies, and expectations about monetary policy in the United States. Despite these uncertainties, some important statements can be made with some confidence: The Eurozone economy is on the mend; the Brazilian and Russian economies are in recession; the US economy is rebounding from a bad first quarter; and the Chinese economy is growing relatively slowly. In this issue of the Global Economic Outlook, our far-flung economists offer their views on the economic situation and the outlook for the near and longer term.

First off, Patricia Buckley comments on the critically important US economy. She discusses how the decline in real GDP in the first quarter was possibly due to more than simply bad weather. Rather, she suggests that the government’s method of measuring GDP might be flawed in a way that suppresses first-term GDP. Patricia also notes that another indicator of the economy, employment, suggested greater strength in the economy than did the GDP numbers. Based on her analysis, Patricia says that “the United States should experience stronger growth in the second half of the year.”

Second, Alexander Börsch provides an analysis of the Eurozone economy. He says that the recovery in the economy continues, albeit in an “unspectacular manner.” Going forward, Alexander points to various measures of business confidence as boding well for accelerated growth. Of particular note is Deloitte’s European CFO Survey,1 in which there are notable differences in sentiment by country, with a high level of optimism in Spain, pessimism in France, with Germany somewhere in between. The survey also indicates that CFOs see national government structural reforms as most likely to cure what ails the Eurozone.

In our next article, I discuss the Chinese economy. I discuss how, after a series of moves easing monetary policy, there are now signs that the economy is, at the least, starting to stabilize rather than decelerate. On the other hand, China’s export sector continues to suffer the effects of a strong currency and weak overseas demand. In addition, I look at the recent debt-driven surge in equity prices in China and the risks this might pose to the economy.

Fourth, I examine the Japanese economy. Despite the Bank of Japan’s very aggressive program of quantitative easing, it appears that the economy is having trouble taking off. For example, despite a cheap Japanese yen, exports have not surged as expected. Likewise, domestic demand has disappointed, with the consumer sector remaining dormant as real wages decline and the lagged effect of last year’s tax increase continues. On the other hand, Japanese corporate profits have soared, potentially setting the stage for a rebound in wages.

In their article on Russia, Akrur Barua and Lester Gunnion discuss the current downturn. They note that, although many factors have made Russia’s situation worse, monetary policy has been largely successful in stabilizing the currency and reversing the trend toward higher inflation. Although a rebound in oil prices will help the economy, Akrur and Lester discuss the fact that Russia’s expected growth over the coming decade is the lowest of the major emerging markets. This reflects a declining labor force, excessive dependence on oil and gas, a relatively high level of state involvement in the economy, and inadequate investment.

The United Kingdom is our next country of focus, with an article by Ian Stewart that takes a notably optimistic view of the outlook, despite the recent slowdown in growth. Ian notes that economic fundamentals are currently quite good, boding well for a rebound in growth. Plus, although productivity growth has been poor recently, Ian offers some reasons to expect a resurgence in productivity in the coming years that will help to maintain strong growth. Finally, he suggests that it is more likely than not that, following an expected referendum, the United Kingdom will remain in the European Union.

In our next article, Akrur Barua returns with an analysis of India, an economy that appears to be growing faster than China. Akrur notes, however, that aside from headline GDP figures, other economic indicators “have been rather subdued.” Thus, it is not entirely surprising that, with inflation decelerating, the central bank has eased monetary policy. Going forward, Akrur suggests that monetary policy alone will not be sufficient for growth, or even for boosting credit market activity. As such, he discusses the prospects for financial market reforms that could play a role in better utilizing India’s savings and unleashing its entrepreneurs.

Finally, our last article looks at Brazil. Akrur Barua finds that Brazil is most likely already in recession. He notes the poor economic performance of the first quarter, the exception being the relative strength of exports. Moreover, economic fundamentals point to further troubles ahead. A cut in government subsidies led to higher electricity prices, boosting inflation, in turn preventing the central bank from easing monetary policy. A weak currency has played a role as well. The result is a combination of tight monetary and fiscal policy that, while beneficial in the long run, will suppress activity this year. Therefore, don’t expect a recovery until at least 2016.