Themes in the Global Economy in 2016 and Beyond

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WP_20150523_055ECONOMY & MARKETS

Volume X| Issue 1|2016

Themes in the Global Economy in 2016 and Beyond

Foreword

Eurobank Research is resuming the publication of Economy & Markets under the supervision of Dr. Tasos Anastasatos, Deputy Chief Economist. This publication intends to provide in-depth analysis of structural issues concerning both the Greek and the global economy, of longer-term interest, beyond the conjecture. Issues are presented in a rigorous manner, yet accessible to a wider audience of economically proficient readers. Economy & Markets has a track record of significant, cutting-edge contributions, which influenced public dialogue since 2006. Our aim is to abide by the high quality standards set by the title’s history.

In this Issue:

This issue features an analysis of some of the main themes that will set the framework for the course of the global economy in the months and years to come. The list is selective, not exhaustive; from the themes that occupied the attention of policymakers and market participants recently, we focus on those that we think will have a more important impact beyond the medium term.

Recent months have seen a culmination of a discussion among policy makers, market participants and the wider public of the risks surrounding the global economy. Related concerns were triggered by signs of weakness in the recovery following the financial crisis and the Great Recession of previous years. In developed economies, the ongoing process of repairing the balance sheets of households, corporates and governments from previous years’ financial excesses acts as a drag to growth, which is only partially counterbalanced by –the slow progress of- structural reforms aimed in boosting productivity. Emerging markets face the challenge of coping with turbulence in commodities and oil markets, while at the same time reforming their growth model in the direction of achieving a better balance between contributions from exports and domestic demand. Furthermore, there are voices suggesting that it is likely that Governments and Central Banks of developed and developing countries alike have already used most available weapons in their arsenal in order to boost growth and there are not many more things they can do in case the outlook takes a turn to the worse. The picture is blurred even further by Brexit, an aggravation of geopolitical tensions and an evolving refugee and migration crisis. The combination of these factors has led many international organizations and investment houses to downgrade their forecasts for global growth in 2016, with a slow improvement foreseen for 2017.

Hence, questions of weakness in the medium-term horizon have been generalized to a debate regarding the ability of the current globalized growth model to sustain the current potential growth rates in the longer-term horizon.  This is especially so given that a host of important structural factors come into play in the years to come and are expected to challenge the way we think about global growth. These include, inter alia, climate change, ageing in developed economies, exhaustion of natural resources and over-indebtedness.

This article aims in contributing in this dialogue by examining certain issues that we think will have a more lasting impact on the global economy, while also raising awareness of certain other important themes. In detail, this issue includes:

Section 1: The Slowdown of the Chinese Economy and Spillovers. After reviewing the economic model of China in historical perspective, we examine policy challenges that the Chinese authorities have to deal with in their effort to switch, from an export-led model of growth, to a new model that has a more substantial contribution from domestic demand. This has to be done while, at the same time, addressing the macroeconomic and financial imbalances of the previous model, deter a hard landing of growth, and complete the unfinished transition of the Chinese economy into a market economy. Our analysis includes an econometric test of consistency for official GDP growth figures from high-frequency indicators and calibration of scenaria for the evolution of growth in China in 2016 and 2017. Subsequently, we evaluate the potential for spillovers from the slowdown in China in the global economy, also describing channels of contagion. The section concludes with brief market guidance.

Section 2: The Implications of Expansionary Monetary Policy. This section examines the effort of monetary policy authorities worldwide to deal with sluggish growth and low inflation, while in parallel reigning in concerns about stability of the financial system. In particular, we focus on two interrelated topics, the divergence in the stance of monetary policy between the Fed and the ECB, and the implications of the negative interest rates policy.

Section 3: The Oil Price Decline: Causes, Repercussions and Outlook. This section begins by investigating the main factors that contributed in the recent slump in oil prices, namely rapid supply growth, easing concerns over the impact of geopolitical tensions on oil supply, and a change in OPEC’s strategy. While we also find demand-side factors to have contributed, it appears that the decline was primarily supply-driven. In accordance to the nature of the phenomenon, we examine the expected impact of lower oil prices on economic activity and their differentiation between oil-producing and oil-importing countries. The section concludes with a note for theoutlook of global oil prices and the expected sustainability of the price declines in the medium term.

Section 4: Other Important Themes. This section briefly describes other topics, which we believe market participants should bear in mind in the months and years to come, as a way of raising awareness. These include the implications of Brexit for the UK, the EU and the global economy; geopolitical tensions and related risks; mega-trends, i.e. issues that can cause structural shifts in the global economy in the very long term.

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