World economy at present: Spillovers amid weak growth?

By Dr B K Mukhopadhyay

The latest World Bank assessment [Global Economic Prospects] is here - World Economic Growth disappointed again in 2015, slowing to 2.4 percent, and is expected to recover at a slower pace than previously envisioned. Growth is projected to reach 2.9 percent in 2016, as a modest recovery in advanced economies continues and activity stabilizes among major commodity exporters.  A more protracted slowdown across large emerging markets could have substantial spillovers to other developing economies, and eventually hold back the recovery in advanced economies, accordingly. Side by side, the report has warned that broad-based slowdown across developing countries could pose a threat to hard-won gains in raising people out of poverty.

The IMF [Intertiol Monetary Fund] also opines that the global economic activity remains uneven but with a gradual improving trend despite the turmoil in fincial markets - it trimmed its forecasts again. Downplaying the worst start to the year on record in US equity markets, the IMF thinks fincial markets are overreacting.

Many Questions Loom Large

Now the big question that has been raised is - did the Fed err in raising rates for the first time in nearly a decade? There are reasons to believe the apprehensions- since the Federal Reserve raised interest rates from record lows in December 2015 the global picture has darkened. Stock markets have plunged and oil prices have skidded. Chi’s leaders have struggled to steer the world’s second-biggest economy.  Virtually no chance is there that the Fed will suddenly reverse course and roll back the quarter-point increase in its key short-term rate as announced. Yes, the probability is there that  the Fed might sigl that the pace of three or four additiol rate increases that many had expected this year could become more gradual — with perhaps only two rate hikes this year and not starting until midyear.

The US economy slowed late last year, but now the  Federal Reserve confirms that it was “closely monitoring” global economic conditions, but would not raise interest rates in a decision widely expected by most alysts. US economic growth had slowed as exports fell because of the strengthening dollar.

Obvious enough - the most visible sign of the economic fear has been the sharp fall in the stock market, even after registering significant gains. Side by side, Chi has unnerved investors because of an economic slowdown that Beijing seems incapable of maging properly. No doubt, the country’s decelerating growth has shrunk global commodity prices and the emerging market countries that have supplied them to Chi.

All is not well in the oil front

Oil prices have continued to fall, already hitting 11-years lows under $30 a barrel amid concerns about slowing growth in Chi, which has battered global stock markets. The price of oil reached a 12-year low of $28.15 a barrel before rebounding to more than $31.The World Bank has slashed its forecast for oil prices this year, saying the cost of a barrel of crude will stay near its current lows for the rest of 2016. The Washington-based institution is already of the view that  a glut of oil that sent prices crashing by almost half last year and another 27 percent this month will continue to domite the market for the next year.

If we glance back it could be located that just even two yeas ago, oil was trading at above $115 a barrel.  It is very clear that low prices for oil and commodities are likely to be with us for some time.  There are reasons to believe that while we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.

A forecast by the Intertiol Energy Agency  reflects that   prices could fall further as new Iranian output cancels out production cuts elsewhere, leading to a third successive year when supply exceeded demand by 1m barrels a day.

Investors expected the major oil producers to cut production in response to falling demand, but instead the Saudi-led OPEC tions, Russia, and the US oil frocking firms have until recently maintained the flow of crude into world markets.

The World Bank, a major lender to developing tions, opined that the market had reached a turning point and the “fundamental drivers of oil demand and supply” are “likely to partly reverse”. It argued that prices would stabilize below $40 for the rest of the year as high-cost oil producers make production cuts “that are likely to outweigh any additiol capacity coming to the market”. A modest pickup in global growth would also prevent a further slump.

Other areas are also not that promising

It has also been a fact that the prices for commodities are expected to be weighed down by a plentiful supply of food and metals amid slowing demand in emerging market economies. In all, prices for 37 of the 46 commodities monitored by the World Bank were revised lower for the year. “Emerging market economies have been the main sources of commodity demand growth since 2000. As a result, weakening growth prospects in these economies are weighing on commodity prices. A further slowdown in major emerging markets would reduce trading partner growth and global commodity demand, accordingly.

The World Bank President is very correct in pointing out that more than 40 percent of the world’s poor live in the developing countries where growth slowed in 2015, “Developing countries should focus on building resilience to a weaker economic environment and shielding the most vulnerable. The benefits from reforms to governce and business conditions are potentially large and could help offset the effects of slow growth in larger economies.”

(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 reached at m.bibhas@gmail.com)