Is the global economy heading towards another jerk?

By Dr B K Mukhopadhyay

2015 is drawing steadily towards the end. It is time to see what is in store, how the global economy could perform in 2016 and what the writings on the wall are! Let us have a quick look at some of the very recent happenings globally.

Michael Snyder is not wrong - just the other day -  while pointing out that  global economic activity is slowing down  and a whole host of signs are indicating that we are essentially exactly where we were just prior to the great stock market crash of 2008.  He has located as many as 11 critical indicators termed as absolutely screaming - that the global economic crisis is getting deeper.

The indicators tested on this score may be seen as: - the price of oil crashed below 40 dollars a barrel just like before when the stock market collapsed and now it has happened again; the price of copper has plunged all the way down to $2.04 [the last time it was this low was just before the stock market crash of 2008]; the Business Roundtable’s forecast for business investment in 2016 has dropped to the lowest level that was seen since the last recession; corporate debt defaults have risen to the highest level compared to that  seen since the last recession (corporate debt in the U.S. has approximately doubled since just before the last fincial crisis); the Bloomberg U.S. economic surprise index is now at a level lower than it was at any point during the last recession; credit card data shows that holiday sales have gone negative for the first time since the last recession; U.S. manufacturing is contracting at the fastest pace compared to that seen since the last recession; the velocity of money in the United States has dropped to the lowest level ever recorded ;  late last month the Bloomberg Commodity Index hit a 16 year low; (in 2008, commodity prices crashed just before the stock market did);  stocks have now tended to crash  we are 15 months after the most recent peak (in the past, about 12-18 months after a peak in corporate profit margins);  junk bonds right now have dropped to the lowest point  repeating the same trend noticed at 2008.

He cautions that even ‘if just one or two of these indicators would flash red, that would be bad enough - the fact that all of them seem to be saying exactly the same thing and tells us that big trouble is ahead’. He also cautioned that ‘the exact  patterns that we experienced back then are playing out once again right in front of our eyes, and the more people that we can warn in advance the better’.

Citigroup alysts are projecting that there is a 65 percent chance that the U.S. economy will plunge into recession in 2016… The outlook for the global economy next year is darkening, with a U.S. recession.

Then what about the developing world - will it be high and dry?

The Chinese GDP growth had fallen to the lowest level since the last recession.  As the global economic activity is slowing down, the same would be deeply affecting Chi’s export-led economy in as much as one third of earnings has been there through exports.

As the U.S. economy enters its seventh year of expansion following the 2008-09 crisis, the probability of recession will reach 65 percent. Citi’s rates strategists wrote in their 2016 outlook - a rapid flattening of the bond yield curve towards inversion would be a key warning sign!!

What do the realities now reflect - neutrally speaking?

Is it not a fact that oil, gold and silver, junk bonds and Chinese stocks have crashed; among others (dozens of other stock markets around the world have already crashed). The 7th largest economy on the entire planet has entered a full-blown economic depression. Latin America’s largest economy shrank- more than alysts’ forecast - as rising unemployment and higher inflation sapped domestic demand, pulling the tion deeper into what Goldman Sachs now calls “an outright depression.”  Gross domestic product in Brazil contracted 1.7 percent in the three months ended in September, 2015. Economic and non-economic uncertainty that has persisted for several months continues to hurt the Brazilian economy.

Activity in Chi’s services sector—the biggest contributor to gross domestic product—slowed in November, 2015 from the previous month, according to a private survey. “The drag from manufacturing and the broad-based sluggishness of the services sector means that Chinese real GDP growth continued to slow in the fourth quarter in 2015, as expected. More broadly, the drag on global growth from slumping Chinese demand is likely to persist into 2016,” according to PNC Fincial Services.

Services accounted for 51.4 percent of growth during the third-quarter 2015-16, compared with 40.6 percent for manufacturing. Moreover, services growth is outperforming the agricultural and industrial sectors.” Over the past four quarters, the agricultural sector grew 4.8 percent, the industrial sector grew a mere 0.2 percent, while the service sector grew a remarkable 11.9 percent, opined  the Federal Reserve Bank of San Francisco’ latest report. But while the overall positive trend in services is a boon to Chi, the report argues it’s unlikely to provide much support for the global economy.

Of course it is heartening to locate that India’s ranking has improved to 55th in the Global Competitiveness Index (GCI). The improvement in India’s ranking in the GCI can be attributed to recent improvements in macroeconomic fundamentals, continuation of ongoing reforms process and improvement in business sentiments with innovative steps taken by the Government to facilitate ease of doing business.  There has been improvement in budget and current account deficits. The Reserve Bank too has estimated GDP growth in the current fiscal. Standard & Poor’s [S&P] Ratings Services projected that  India’s economy will grow at 7.4 per cent in the current fiscal, which will further improve to over 8 per cent in 2016-17. Indian economy grew at 7.3 per cent in last fiscal. Still, S&P noted that significant reforms are required with Indian corporate and banks currently facing a weak operating environment.

It is not at all good to note indeed –that recent rain shortages and possible effects of El Niño may intensify food insecurity in Ethiopia. Migration surged this summer as Ethiopians left for neighboring countries like Sudan, and farther, to Gulf and European tions in search of higher wages, better opportunities, and now, escaping shortages caused by a lack of rain. The UN projects that 4.5 million Ethiopians will need aid, up from the 1.5 million estimated earlier this year, although the Ethiopian government has dismissed the need for intertiol food aid.

As the saying goes, one man’s trash is another man’s treasure.  It is of course good to note that with Malawi facing difficult economic times and high levels of unemployment, some women and youths have found fincial relief in maging and recycling waste, while improving environmental conditions.

British banking giant HSBC assessed that total global trade is down 8.4 percent so far in 2015, and global GDP expressed in U.S. dollars is down 3.4 percent.

Upshot – not rosy days ahead!!

(The Writer, a noted Magement Economist and an Intertiol Commentator on business and economic affairs, Director, Netaji Subhas Institute of Business Magement, Jharkhand, can be located at m.bibhas@gmail.com)