Tags: investors | volatile | stock market | global economic growth

Erosion of Global Growth Shows No Signs of Stopping

Erosion of Global Growth Shows No Signs of Stopping
(Dollar Photo Club)

Friday, 04 September 2015 07:30 AM Current | Bio | Archive

Recently we have seen important spikes in volatility, which translated in increased “uncertainties,” in major markets all over the globe, especially since August 11 when China devalued “unexpectedly” its currency.

Fitch Ratings released an interesting report titled “China’s New Normal: Slower Growth with More Volatility.”

The rating agency expects China’s trend growth rate to decline further to about 5 percent on average over 2016-2020 as the country adjusts and rebalances.

The declining productivity of investment, the cost of supporting China’s high and still-rising debt burden, which is for an exorbitant part related to the property sector and emerging pressures on the Chinese yuan and foreign reserves all point to tightening constraints on China’s investment-led growth model.

China’s new normal of slower growth, both in real economic activity and in financial markets should cause widespread higher volatility, which could and probably will cause further wild swings and damage in many markets all over the globe.

Precisely a week ago, Moody’s released its report entitled “Downward Revisions to 2016 Global Economic Outlook” wherein it revised downward its forecast for GDP growth in the G20 economies to 2.8 percent in 2016, down from 3.1 percent earlier.

The revision mainly reflected the impact of a more marked slowdown in Chine to now 6.3 percent, down from 6.5 percent previously while recent indicators continue to show China’s slowdown in exports and investments continued well into Q3 while employment also continued to weaken.

The ongoing policy support from the Chinese government is likely to offset only in part the underlying slowdown in the Chinese economy.

Moody's also noted broad-based equity price falls could have a negative impact on investor and consumer sentiment.

The Nikkei Hong Kong PMI printed its lowest level since 2009 at 44.4 for August, down from 48.2 in July with:
  • Output and new business both contracting at the steepest rates in over six years;
  • Staff numbers being shed at the fastest pace since April 2003 and
  • Purchasing activity declined at sharpest rate since February 2009.
If you ask me, that doesn’t bode well for mainland China.

ECB President Mario Draghi made various interesting, but unfortunately not optimistic/promising statements. in Europe at the press conference after the ECB Governing Council decided to keep the ECB key interest rates unchanged.

Some key statements of interest for long-term investors are:

  • “… Regarding non-standard monetary policy measures (= EU QE), following the announced review of the public sector purchase program’s issue share limit after the first six months of purchases, the Governing Council decided to increase the issue share limit from the initial limit of 25 percent to 33 percent” and “ (the buying program) is intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until we see a sustained adjustment in the path of inflation.”
Increasing the limit will have a “deepening” effect of the ECB QE undertaking and should be seen as a preparation to its extension, about which former ECB President Trichet already stated the ECB is now ‘explicit’ on the possibility of a QE extension.

Looking at the EU inflation rate data for getting an idea what the ECB is talking about and that for August stands at 0.2 percent, which is far below the 1.85 percent EU average rate, it becomes crystal clear the ECB is in trouble for getting back ASAP to its goal of an inflation rate of close to 2 percent.

Mr. Draghi also stated:

  • “… renewed downside risks have emerged to the outlook for growth and inflation … Real GDP in the euro area rose by 0.3% in the second quarter of 2015 … indicators point to a broadly similar pace of real GDP growth in the second half of this year … reflecting in particular the slowdown in emerging market economies, which is weighing on global growth and foreign demand for euro area exports … (we and according to the staff projections) foresee annual real GDP increasing by 1.4% in 2015, 1.7% in 2016 and 1.8% in 2017  … The risks to the euro area growth outlook remain on the downside, reflecting in particular the heightened uncertainties related to the external environment.”
  • When asked about his opinion about a Fed rate hike and its impacts, Mr. Draghi said: “… we never really comment on other jurisdictions’ policies, but if this is necessary to achieve the inflation objectives and more generally, more broadly, the objectives of the Federal Reserve's monetary policy, this is a plus for the world.”

Finally, and in accordance to all the above, in the IMF’s note that was prepared for the G20 meeting in Ankara, Turkey, we read: “Risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook.”

All this encapsulates an impressive series of warnings to long-term investors we are heading into challenging times where it will be extremely difficult to remain calm, realistic and above all patient when it comes to taking investment decisions because of all the ongoing and still coming volatility spikes and rising uncertainties.

It’s a fact global growth continues slowing down, and there are no signs yet we are closing in on turning the corner any time soon.

Maybe not such a bad idea keeping in mind what Benjamin Franklin said: “He that can have patience can have what he will.”

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Maybe not such a bad idea keeping in mind what Benjamin Franklin said: “He that can have patience can have what he will.”
investors, volatile, stock market, global economic growth
Friday, 04 September 2015 07:30 AM
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