Global Economic Prospects

Abstract

From the start of this year, pessimism as well as uncertainty have become the most prominent features of business and economic discourse in addition to news. Prima Facie the mood appears justifiable as various unconstructive dynamics -the crash of the Chinese stock market, volatility in crude oil prices and further shocks to the economy of the United States –are evidently colluding; the question that begs is whether these current developments are a sign of impending global recession on the economic sense. This prelude to the final research paper will critically analyze relevant regarding the current state of the global economy with a view to establishing a global recession is imminent.

Introduction

From January of this year, the global economy has experienced a renewed spell of serious volatilities within its financial markets characterized by sharply declining prices in terms of equities coupled as well as other precarious assets (Roubini, 2016). Towards this end, a number of factors are at play: concerns regarding the Chinese economy, apprehensions about the faltering of the US economy given the elevation of interest rates by the federal reserve, the escalating Iranian-Saudi conflict as well as signs and most particularly, the falling commodity and oil prices due to severe plummeting of global demand. The decline crude oil in particular coupled with insufficient market liquidity is a course for alarm regarding the overall health of the global economy. On this backdrop, it is important to assume that indeed these are signs of an impending global recession.

This research exercise will therefore seek to critically analyze relevant literature with a view to establishing whether the world is set for another economic and the potential ramifications.

Literature Review

According to the findings of The Conference Board (2016) this year has been underpinned by pessimism as well as uncertainty have become the most prominent features of business and economic discourse in addition to news. Prima Facie the mood appears justifiable as various unconstructive dynamics -the crash of the Chinese stock market, volatility in crude oil prices and further shocks to the economy of the United States –are evidently colluding; the question that begs is whether these current developments are a sign of impending global recession on the economic sense. As a result of the net effect of these factors, the project economic growth has been revised downwards to 2.5, with the greatest re-adjustments being targeted at emerging economies, of which Russia and Brazil being the most distinct (The Conference Board, 2016).

The “Commanding Heights Video” is a classical exemplar of the impacts of economic volatilities on less developed countries and the general health of the global economy. The video seeks to demonstrate the implications of a globalized economy when major players experience stunted growth period. It is therefore a confirmation that the current situation is a creation of the interconnected nature of global markets (YouTube, 2016).

Writing in the Guardian News Paper El-Erian (2016), notes that there are profound doubts about the sustained relevance the “new normal” regarding low growth accrued from mainstream acceptance by Western economies. He thus contends that the world may be heading towards facial as well as economic crossroads given the current policy directions.  These fears reading the health of the global economy together with its associated financial markets is not confined to newspaper publications. In its 2016 “Global Economic Outlook,” the World Bank (2016), agrees that there are signs to indicate that the world is seemingly headed for a global recession similar to the one experienced during the 2008/2009 epoch. The monetary body further notes that global economic growth of the current problems started last year when the global economy expanded by a disappointing 2.4% and the envisioned recovery in 2016 is expected to be much slower compared to previous periods. With the 2.9% projected growth in the current year, especially driven by advanced economies, the institution expects meagre stabilization of principle commodity exporters. However, this stabilization notwithstanding, the projected growth might not be realized given the prolonged slowdown in many emerging economies which could in turn portend significant spillovers to developing countries eventually curtailing the recovery process in developed nations. Through  economic outlook for 2016 also notes that a wide-based slowdown in countries developing nations possess an elevated threat to gains realized in addressing poverty given that in excess of 40% of the poorest people in the world line in this nations, which recorded marked slowdown in growth for 2015 (World Bank, 2016).

In its “Prospects for the world economy in 2016–2017,” the United Nations  (2016) confirms that the global economy has been on a downward spiral since last year as a result of stunted aggregate demand, declining commodity prices as well as rising volatilities in financial markets within major economies. Going forward, the organization estimates that the projected is 2.4 percentage points representing a downward revision from its 2.8% projections due to the effects of static capital formations in addition to subdued aggregated demand. It however argues that if the global economy is supported by less restrictive fiscal as well as accommodative monetary perspectives throughout the world, 2016 could realize a 2.9% growth and a further 3.3% in 2017 (United Nations , 2016).

These growth projects are however contingent upon the correct timing coupled with the rate at which the monetary policy in the United States normalizes. This is expected to curtail further policy uncertainties on the one hand, while preventing disproportionate volatility in asset pricing and exchange rates (United Nations, 2016).

Through the report, the United Nations further contends that while it is highly probable that the normalization will ultimately result in higher cost in regards to borrowing, higher interest rates should inspire firms “front-load investments” in the short-term. Further improvements in the overall health of global markets is further hinged on a reduction of downwards pressures in regards to commodity prices that could encourage fresh investments in addition to lifting growth, especially in commodity reliant economies (United Nations , 2016). The economic prospects for 2016 and beyond as established by the United Nations are summarized in the figure below.

Source: (United Nations, 2016)

Roubini (2016) identifies several factors currently informing the concerns with global economic prospects. These include:  concerns regarding the Chinese economy, apprehensions about the faltering of the US economy given the elevation of interest rates by the Federal Reserve, the escalating Iranian-Saudi conflict as well as signs and most particularly, the falling commodity and oil prices due to severe plummeting of global demand. The decline in oil prices in particular, coupled with insufficient market liquidity are key indicators of an impending recession. As a result of the net effect of these factors, the project’s economic growth has been revised downwards to 2.5, with the greatest re-adjustments being targeted at emerging economies, of which Russia and Brazil being the most pronounced.

According to the International Monetary Fund projects on the projections of the global economy for 2016, the world economy remained largely subdued in 2015; a case that is replicating itself in 2016. Despite developing as well as emerging economies accounting for more than 70% of the entire global growth, declines continue to be noted for the 5^th year in a row despite the diffident recovery sustained by advanced economies (IMF, 2016).

Framework

            In order to understand the factors affecting the world economy currently, it is important to consider the theoretical framework below that represents different economic processes predicated on an array of variables as well as rational and/or quantitative associations between them (Young & Zilberfarb, 2012).

Figure: The IS/LM Framework

Source: Own Edit

Case Study Data (China)

The IMF (2016) identifies three critical transitions that have shaped the current volatilities in the global economy. To begin with, the steady slowdown coupled with economic rebalancing activities in regards to the Chinese economy away from conventional investments in addition to manufacturing towards services and consumption has dampened the prospects for 2016 and beyond or at least in the short-term. Secondly, outlook with respect to the global economy is being continuously influenced by declining prices for energy (crude oil) as well as other commodities. Finally, the plodding tightening of monetary policies within the United States within the setting of a robust recovery process together with the easing of monetary policies by other developed nations  portend serious impacts on the health of emerging and developing markets (IMF, 2016).

From a general perspective, the growth in the Chinese economy is changing as broadly anticipated. However, the declining imports as well as exports partially reflect weaker manufacturing and investment activities. These developments coupled with various market concerns regarding the performance of the country’s economy are having a ripple effect which has negatively affected other countries especially those in Africa through feebler commodity prices and trade channels and through dwindling confidence as well as rising volatility within financial markets (IMF, 2016).

The declining oil prices have formed a common theme in the literature reviewed thus far and the IMF (2016) further presents that this is the effect of a decline that began in 2015. The overriding reason behind this decline is the expectations by  “Organization of the Petroleum Exporting Countries ”(OPEC) in regards to sustained production increases. This increase is against and decline in global consumption trends as shown below. China being one of the largest importer of oil and supplier of major consumption items, it is highly likely that any volatility in its financial markets and general economy will undoubtedly affect the global economy profoundly.

IMF Projections for 2016 Economic Outlook

            In January of 2016, the International Monetary Fund released its projections in regards to global economic outlook for the year where among other things it noted that:

• The global economy would expand by 3.4 percentage points in 2016 and 3.6 % in 2017. In the projections, global economic activities were projected to take a more gradual pickup compared to 2015.
• A modest as well as uneven recovery is expected to occur in advanced economies which will be a continuation of a process now in its fourth year. However, the slowdown as well as rebalancing of China’s economy, declining commodity prices due to the happening in china in addition to strains within a number of other emerging country’s such as Russia, Brazil, South Africa and India will affect growth prospects in this regard.
• Risk faced by the global economic stance will remain tilted downwards for 2016-17 in regards to continuing adjustments within the world economy.

Figure 3: IMF’s Projections

Source: https://www.forbes.com/sites/billconerly/2015/11/24/global-economic-forecast-2016-2017/?sh=7fa6279f3ace#71c1a4bf43f

However, since providing the projections in January, the IMF (2016) and World Bank have revised the figures downwards as a result of the crash witnessed in the Chinese securities and the resultant reduction in its demand for major products like oil in addition to effect of increased production by OPEC (World Bank, 2016;IMF, 2016). Towards this end, advance economies will only grow by an additional 0.2% from last year’s figures meaning that their economies will only grow by 2.1 percentage points. In regards to emerging as well as developing countries, their economies are forecasted to expand by an additional 0.3% from last year’s 4%-the lowest rate since the 2008/2009 economic crisis largely due to uncertainties in the Chinese market.  China will have the greatest impact in this minimal growth as it is growth rate is expected to drop to 6.3% and 6.0% in 2016 as well as 2017% respectively. This is indicative of a weaker growth in investment due to the rebalancing of this economy. Sub-Saharan Africa will be underlined by gradual growth which will pick up in 2017 as the region records the highest global growth rates for the fourth year. This projected slowdown is credited to falling commodity prices and decline in demand from China, which is currently the main trade partner with this region (IMF, 2016).

Analysis

            From the literature reviewed and case data relating to the Chinese economy and its impact on the global economy, it is evident that any growth in global growth for 2016 will not be in any way or else form higher than that of 2015. In this regard, it is appropriate to surmise that given the current global trends, the global economy is headed for economic growth only comparable to growth in comparable in recent years. However, this projected growth is occur rather differently in that European nations are expected to perform comparatively better , while Asian economies will p worse than before and natural resource-dependent economies especially African economies will perfume worse due to factors beyond their scope.  As demonstrated by the case and associated day, the Chines economy will be a major determinant of the overall health of the global economy given the fact that it is the largest consumer of raw material and particularly oil. Any volatilities in its financial market therefore means that the country will import and export less thus affecting the world economy profoundly given the loss in revenue and the need to protecting domestic industries from external shocks. The United States too will play a crucial role in this as it is expected that the Federal Reserve will sustain the current monetary policy predicated on increased interest rates, which are expected to among other things to inspire capital investments

Conclusion and Recommendations for Further Study

            From this research exercise, one cannot conclude that the world is headed for imminent recession as the projections only relate to the short-term. However, there is uncertainty regarding the long-term health of the global economy given the current happenings in emerging economies vi-sa-vi the relative strengthening of developed economies. China has emerged a major influence in the current outlook in regards to the world economy and it thus necessary to conduct further investigation on the role the country can play in addressing current challenges. In this regard, the US Dollar is under increasing pressure and as such, it would be appropriate for the IMF as well as the World Bank to examine how the chines currency-the Renminbi- now a reserve currency can ease the pressure on the USD. More importantly, it is important to study how and why the effects of volatilities in major  economies affecting developing countries especially natural resource-based economies and how these markets can be cautioned against effects of factors that are beyond the making and scope,.

Advocacy (My Role as a Global Citizen)

Though limited, I believe I have a role to play in regards to advocating for better economic outcomes given current projections. The current uncertainties within the world economy are largely driven by unfair economic practices. A case in point is continued devaluation of the Renminbi given the monumental role it can play in providing an alternative to the United States Dollar. Through research, I can therefore offer recommendations aimed at addressing economic malpractices such as unfair trade barriers driven by the World Trade Organization in favor of developed nations and as such advocate for a conducive playing field, which will protect vulnerable economies from volatilities in major as well as emerging economies.

References

El-Erian, M. (2016, February 3rd). Is stagnation the ‘new normal’ for the world economy? Retrieved March 31st, 2016, from The Guardian: http://www.theguardian.com/business/2016/feb/03/is-stagnation-the-new-normal-for-the-world-economy

IMF. (2016, January). Subdued Demand Diminished Prospects. Retrieved March 31st, 2016, from International Monetary Fund: http://www.imf.org/external/pubs/ft/weo/2016/update/01/

Roubini, N. (2016, February 4th). The new abnormal state of the global economy is here to stay. Retrieved March 30th, 2016, from The Guardian: http://www.theguardian.com/business/economics-blog/2016/feb/04/global-economy-new-abnormal-inflation-growth-monetary-policies-asset-prices

The Conference Board. (2016). Global Economic Outlook 2016 – Key Findings. Retrieved March 31st, 2016, from The Conference Board: https://www.conference-board.org/data/globaloutlook/

United Nations . (2016). Prospects for the world economy in 2016–2017. Retrieved March 31st, 2016, from United Nations: http://www.un.org/en/development/desa/policy/wesp/wesp_current/2016wesp_ch1_en.pdf

World Bank. (2016). Global Economic Outlook, 2016. Retrieved March 31st, 2016, from The World Bank: http://www.worldbank.org/en/publication/global-economic-prospects

Young, W., & Zilberfarb, B.-Z. (2012). IS-LM and Modern Macroeconomics. New York, NY: Springer Science & Business.

YouTube. (2016). PBS Commanding Heights. Retrieved March 31st, 2016, from YouTube: www.youtube.com/watch?v=w9ms2WOZi74