Exactly a week ago, we highlighted [10] a WSJ piece which quoted WTO chief economist Robert Koopman as saying the following about the outlook for global growth: “We have seen this burst of globalization, and now we’re at a point of consolidation, maybe retrenchment. It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should.”
Explaining further, The Journal noted [11] that “for the third year in a row, the rate of growth in global trade is set to trail the already sluggish expansion of the world economy.”
In no uncertain terms: global growth and trade are grinding to a halt, something we’ve been keen to drive home this year using a variety of data points not the least of which are freight rates which, as Goldman noted back in May are likely to remain depressed until 2020, dead cat bounces in the Baltic Dry notwithstanding (for more on this, see here [12]).
All of the above was confirmed last Wednesday by the OECD which cut [13] their forecast for global growth to 3% in 2015 and 3.6% in 2016.
[14]
Of course one of the main problems is decreased demand from China, where sharply decelerating economic growth threatens to plunge the entire emerging world into crisis as the country’s previously insatiable appetite for raw materials suddenly disappeared leaving countries like Brazil out in the cold. Also hard hit is emerging Asia, where the turmoil in China combined with the threat of an imminent Fed hike has created conditions that may ultimately usher in the return of the 1997/98 Asian Currency Crisis (indeed, Malaysia’s central bank governor Zeti Akhtar Aziz has been at pains to reassure the market that the country isn’t set to return to capital controls to shore up the plunging ringgit).
Against this backdrop it shouldn’t come as a surprise that the ADB slashed its growth outlook for the region on Tuesday citing a laundry list of factors, most of which are outlined above. Here’s more [15]:
Softer growth prospects for the People’s Republic of China (PRC) and India, and a slow recovery in the major industrial economies, will combine to push growth in developing Asia for 2015 and 2016 below previous projections.
ADB now sees gross domestic product (GDP) growth for the region coming in at 5.8% in 2015 and 6.0% in 2016—below the March forecasts of 6.3% for both years.
[16]
“Developing Asia is expected to continue to be the largest contributing region to global growth despite the moderation, but there are a number of headwinds in play such as currency pressures, and worries about capital outflows,” said ADB Chief Economist Shang-Jin Wei. “In order to be resilient to international interest rate fluctuations and other financial shocks, it is important to implement macroprudential regulations that, for some countries, may entail some capital flow management such as limiting reliance on foreign currency borrowing.”
The PRC—the world’s second largest economy—has seen growth moderate due to a slowdown in investment and weak exports in the first 8 months of 2015. Growth is now seen at 6.8% in 2015, down from 7.2% projected earlier, and below the 7.3% posted in 2014.
External demand weakness and a slower-than-expected pace of enacting key reforms are holding back India’s growth acceleration, with the pace in 2015 now seen at 7.4%, down from 7.8% forecast earlier.
Southeast Asia meanwhile is bearing the brunt of the slowdown in the PRC—one of its key markets—as well as subdued demand from industrial countries, with growth in 2015 now seen at 4.4%, before bouncing back to 4.9% in 2016.
Soft global commodity prices, including oil and food, are keeping price pressures low with regional inflation projected to decline to 2.3% in 2015, from 3.0% in 2014, although a pickup is expected in 2016. Net capital outflows from developing Asian markets which gained pace in the first part of 2015, exceeding $125 billion in the first quarter, remain a concern as investors anticipated a near term US interest rate hike. As a consequence the region has seen rising risk premiums and weakening exchange rates which could further impede growth momentum, the report said.
A strengthening US dollar poses a threat to Asian companies with large foreign currency exposure, with data showing that the share of foreign currency debt among firms in Viet Nam, Sri Lanka, and Indonesia exceeds 65%. In addition, a declining appetite by the PRC for energy, metals and other commodities, and soft global prices, is a worry for a number of developing Asian commodity-focused export economies, including Mongolia, Indonesia, Azerbaijan, and Kazakhstan.
As that pretty much speaks for itself, we'll close with what we said last week in the wake of the OECD's most recent report:
The big picture takeaway is that slowly but surely, all of the very "serious" people are coming to the same conclusion. Namely that the outlook for global growth and trade is grim, especially by historical standards, and that - although OECD doesn't say this - should serve as a damning indictment of the idea that economic outcomes can be engineered from on high by central planners. The sad reality however, is that far from admitting that the coordinated Keynesian response to the crisis has failed and perhaps even exacerbated the slowdown in growth and trade by perpetuating a global deflationary supply glut, slowing growth will instead be trotted out as an excuse to double down on the very same policies that aren't working.
