Over the past six or so months, the OECD, the WTO, and the ADB have all come out with rather grim assessments of global growth and trade.
Back in September for instance, the WTO warned [8] that the rate of growth in global trade is set to trail the expansion of the worldwide economy for the third year running. As WSJ noted [9] at the time, “before the recent slump, the last time trade growth underperformed the rate of an economic expansion was 1985.”
“We have seen this burst of globalization, and now we’re at a point of consolidation, maybe retrenchment,” WTO chief economist Robert Koopman said. “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.”
“Global growth prospects have weakened slightly and the outlook is clouded by important uncertainties,” the OECD said [10] later in September. “Emerging economies have vulnerabilities that could be exposed by rising US interest rates and/or a sharper-than-expected slowdown in China, giving rise to financial and economic turbulence that could also exert a significant drag on advanced economies,” the organization continued.
Finally, the ADB weighed in [11], noting that “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.”
Those assessments came just as the Fed adopted the “clean relent” in September and make no mistake, the outlook hasn’t changed since then. Just ask IMF chief Christine Lagarde.
In a guest article for Handelsblatt, Lagarde lays bare the risks facing global trade on the way to painting a rather depressing picture for 2016.
“Global economic growth will be disappointing next year and the outlook for the medium-term has also deteriorated,” Reuters says [12], recounting Lagarde’s comments. “The prospect of rising interest rates in the United States and an economic slowdown in China [are] contributing to uncertainty and a higher risk of economic vulnerability worldwide.”
Lagarde warns of the “spillover effects” from the Fed hike, including the possibility that fragile emerging markets may be shaken further at a time when myriad risk factors are already weighing on the space.
China’s transition from a smokestack, investment-led economy to a consumption and services led model as well as Fed policy normalization are “necessary” but should be executed carefully with a mind towards mitigating shocks, she continues.
Specifically, Lagarde is concerned about the nightmare scenario that occurs when EM corporates borrow heavily in dollars only to see their currencies depreciate rapidly, the so called "original sin" that's been largely avoided at the sovereign level, but not by corporates. For an example of what can happen in such instances, see Empresas ICA SAB [13].
As a reminder, EMEs have over $3 trillion in USD-denominated debt:
[14]
"Most highly developed economies except the USA and possibly Britain will continue to need loose monetary policy but all countries in this category should comprehensively factor spillover effects into their decision-making," she goes on to say, underscoring the fact that there are risks both to hiking and to remaining suspended in the Keynesian Twilight Zone.
Ultimately, the takeaway is the the head of the IMF, who supposedly knows about such things, has just delivered a decisively negative outlook for global growth and trade in 2016 and that assessment seems to be at odds with the FOMC. That is, Lagarde is warning on economic growth and the dangerous "spillover effects" of a Fed rate hike cycle just as Janet Yellen is using stronger economic growth as an excuse and a justification for liftoff.
Of course such "truthiness" is tantamount to heresy in today's world, so perhaps this is why Lagarde's criminal case was reopened.
