Introduction Global Economic Outlook, Q4 2015
This summer, the global business climate was shaken by events in Greece and China. In this edition of the Global Economic Outlook, our team of economists provide their outlooks for China, United States, Eurozone, Japan, India, Brazil, Canada, United Kingdom, and South Africa.
In the summer of 2015, the global business climate was shaken by events in Greece and China. First, Greece appeared to come perilously close to defaulting on its sovereign obligations, thus potentially setting the stage for an exit from the Eurozone. While the Greek economy is very small and not directly of systemic importance to the Eurozone economy, there was considerable concern that the default would have a major spillover effect on European financial markets. Fortunately, the issue was resolved when Greece acceded to the European Union’s demands, at least putting off a Greek-fueled Eurozone crisis.
Yet, even while Greece was in the news, concern about the much larger and more consequential Chinese economy was lurking in the background. It was known that China’s economy was slowing, a potential equity price bubble was brewing, and China’s financial system was laden with imbalances. However, once the Greek situation was out of the way, the Chinese situation started to boil over. Equity prices tumbled, the central bank allowed the currency to fall, and then—related or not—global equity prices started to tumble as well. Despite evidence of economic strength in the United States and a continuing recovery in Europe, China’s slowdown has raised many questions about the overall global economic outlook. China has a big footprint in the global economy, influencing commodity prices, capital flows, growth in emerging countries, and business sentiment everywhere.
In this edition of Deloitte’s Global Economic Outlook, our far-flung economists examine these issues and provide their outlook. We begin, quite naturally, with China. In my article, I look at the key issues: the debate over exactly how much the Chinese economy has slowed; the policy response to the slowdown; the relevance of China’s equity bubble and its bursting; the decision to devalue the currency and its implications; and the global impact of a slower-growing Chinese economy. I expect that China’s slowdown is not likely to have a hugely deleterious impact on the United States and Europe.
Next, Patricia Buckley discusses the relatively benign state of the US economy. She notes that, just as things seem to be going reasonably well, there remains a potentially disruptive impact from political conflict involving the budget and the debt ceiling. She also discusses the decision making of the US Federal Reserve (Fed) in the context of inflation and employment. She notes that low inflation is currently being driven by transitory factors and that, given the evident strength of the economy, the Fed is likely to raise interest rates before the year ends. How things will play out, however, will depend in part on how the US Congress approaches budgetary issues.
Alexander Börsch then offers his point of view on the state of the Eurozone economy. He says that the recovery is now broad based and that Europe appears able to withstand the negative consequences of a Chinese slowdown. He notes that every Eurozone economy except France grew in the second quarter. Strength has been derived from export growth resulting from a weaker euro. In addition, lower energy prices have boosted consumer spending. The main weakness in Europe continues to be investment, the direction of which will largely determine how fast Europe grows in 2016.
In my article on Japan, I discuss the continuing weakness of the economy despite the massive program of quantitative easing. I expect that monetary policy, while important, is not sufficient to fix what ails Japan. Rather, further structural reforms—as promised as part of “Abenomics”—will likely be needed. Completion of the Trans-Pacific Partnership will go a long way toward creating the conditions for such reform.
Next, Rumki Majumdar examines the Indian economy. She discusses the relatively strong growth of late, and also looks at the controversy over the best way to measure India’s economic performance. Rumki notes that, as in some other parts of the world, growth has been fueled by consumer spending, while investment has lagged. However, she points to several factors that bode well for an upturn in investment. These include lower energy prices, which have boosted corporate profits, a looser monetary policy, rising consumer demand, and increased government-funded capital spending.
In his article on Brazil, Akrur Barua discusses the poor state of the Brazilian economy, the factors that led to a recent bond rating downgrade, and the potential consequences of that action, which include higher borrowing costs, more capital outflows, downward pressure on the currency, and greater difficulties in addressing Brazil’s serious fiscal imbalances. Akrur also looks at the poor state of consumer finances, weakness of business investment, and the poor international competitiveness of industry. His view is that only some form of political conciliation can start to address Brazil’s woes.
The British economy is the subject of Ian Stewart’s analysis. He notes that although problems in the global economy are having some negative impact on the United Kingdom, the domestic side of the economy is doing well. Lower energy prices combined with a tight labor market are boosting consumer purchasing power, thus fueling a consumer-led recovery. Ian also discusses how global events will likely conspire to delay monetary policy tightening.
In our next article, Danny Bachman analyzes the Canadian economy. Despite two consecutive quarters of declining GDP in the first half of this year, Danny does not believe that Canada has fallen into recession. Rather, the Canadian economy has slowed owing to troubles in the oil industry and their considerable negative impact on business investment. Moreover, the Canadian economy has become heavily dependent on energy to the exclusion of industry. Indeed, Danny suggests that Canada suffers from the “Dutch disease,” in which energy-exporting countries see their non-energy industries lose competitiveness. Danny says that it is not clear whether the decline in the Canadian dollar will help to significantly alleviate this problem.
The South African economy is the subject of Lester Gunnion’s article. The economy is heavily dependent on commodities, and thus the slowdown in China and the rise of the US dollar have had a negative impact on South Africa. The weakness of the South African rand led to higher inflation, which, in turn, compelled the central bank to maintain a relatively tight monetary policy. In addition, Lester discusses the country’s internal obstacles to economic success, including electricity shortages, labor unrest, and a relative paucity of investment compared with other major emerging countries.
In the first of our two special-topic articles, Rumki Majumdar writes about the degree to which emerging markets are well prepared to deal with economic shocks. She looks at five of the world’s leading emerging markets—Brazil, India, Indonesia, South Africa, and Turkey—studying their economic and financial performance in the two years since the so-called “taper tantrum” that occurred following the Fed’s announcement that it would soon end its program of asset purchases. Rumki states that, of the five countries, India appears to be best prepared to absorb problems in the global economy, especially given that it is not a commodity exporter.
In our last article, Akrur Barua, David Gruner, and Sunandan Bandyopadhyay examine global value chains (GVCs), a key component in today’s international trade ecosystem. As production processes get integrated into GVCs that cut across geographies, these value chains are set to benefit both developed and emerging economies as they help businesses become nimble and enable firms and economies to participate more in global trade.