The Perfect Storm Hitting the Global Economy in 2016

The World Bank has suggested the global economy is at risk of being hit by a ‘perfect storm’ in 2016. According to its new Global Economic Prospects report, the Bank is concerned about the widespread slowdown taking place across the globe. And while it expects growth to improve to 2.9%, it still falls below the Banks internal target.

So is this alarmist propaganda or a cause for real concern? A bit of both, actually.

It’s true the world hasn’t faced a similar situation in 30 years. The 1980s were the last time that global growth slowed simultaneously around the world. Again, now, both developed and developing markets threaten to derail economic growth.

Today, the commodity price rout is largely to blame for the current slowdown. Commodity prices fell to new lows last year, with iron ore notably trading at just US$40 a tonne. Iron ore prices are down almost fivefold from their height in 2012.

Of course, you probably won’t need any reminding about who’s to blame for this. As the largest importer of commodities, weaker Chinese demand is the main reason prices have tanked. This price rout, which picked up in the second half of 2015, led to a sharper slowdown in global trade. Few economies have been left untouched. The worst hit have been those that rely on commodity exports for much of their national income. Australia is among them. Canada, Brazil and Russia are a few other notable victims of this.

Needless to say, China has found itself in rough waters as well. The Chinese economy failed to hit its 7% growth target last year. While it just came up short at 6.9%, it’s believed there’s more than a hint of creative accounting taking place. For what it’s worth, the Bank expects China to grow at 6.7% in 2016.

In its report, the World Bank raised particular concern over the future of the BRICs nations.  This refers to Brazil, Russia, India, China, and South Africa. It reckons a 1% decline in growth across the BRICs nations could have a large knock on effect.

Were that to happen, it could hurt emerging market growth by 0.8%. Moreover, this would also lower global growth by 0.4%. The World Bank explains:

If, in 2016, Brics growth slows further, by as much as the average growth disappointment over 2010–2014, growth in other emerging markets could fall short of expectations by about one percentage point and global growth by 0.7 percentage points.

If such a Brics growth decline scenario were to be combined with financial sector turbulence, emerging market growth could slow by an additional 0.5% and global growth by an additional 0.4%.

Should these economies continue to struggle, they’ll remain the biggest threat to a global recovery.

On the upside, however, it expects recessions in Russia and Brazil to bottom out this year.

The US hand in the global economy

Beyond the BRICs, policymaking in the US remains the biggest cloud over the global economy.

The Federal Reserve raised interest rates for the first time in nine years in December. The hike was largely symbolic, as it raised rates by a mere 0.25%. But it was enough to get markets fearing the possibility of more to come. Were that to be the case, the effects of a quick fire rate hiking policy wouldn’t be kind to the global economy.

Why is it so important? Because US interest rates dictate the amount of capital in the system. Yet US capital is more international than most. If the US cuts back on credit expansion, the entire developing world would feel it.

US capital is key to global growth for much of the emerging world. Capital outflows are important in driving up economy activity in these markets. Any significant drawback in outflows could have a lasting effect on emerging nations.

Of course, this all depends on what the Fed does with its rate policy from here. The odd rate hike won’t make a drastic difference. But five or six could. Presently US rates are still at near zero. That remains well below the RBA’s 2% official cash rate. But if the Fed follows through on more hikes in quick succession, the impact on growth could be severe.

Granted there’s no certainty of that happening. The Fed’s latest meeting produced no change in policy. The Fed’s now put a 45% likelihood of a rate hike in March. At the same time, chances for a rate cut were just 3%.

Anything the Fed says about its policymaking should be taken with a pinch of salt. They were talking about a rate lift off for most of last year. But it wasn’t until December when they followed through with a token 0.25% rate hike.

Because of this, there’s no guarantee that US rates are heading up. At least not to any extent that could impact global growth severely. So there’s a likelihood global capital won’t be kept on a leash in 2016.

The World Bank’s questionable motives

One reason to be sceptical of these forecasts on global growth relates to the World Bank itself. It summed up 2015 as a year which failed to live up to expectation. And not for the first time either. Global growth has undershot the Bank’s expectations for five straight years now.

How can we take it seriously when it says that growth could hit 2.9% this year? Growth last year was 0.2% lower than the year before. Not a stellar forecasting record, you must admit.

In saying that, the Bank is probably correct in saying that growth, in the developing world, will weaken in 2016. It reckons the developing world will grow slower than last year’s 4.2%. As long as commodity prices and trade remain sluggish, that’s a good bet.

Either way, one thing’s for sure. 2016 is set to be a busy year for the World Bank.

As a lender of capital to poor nations, business should pick up. Unfortunately, institutions like the World Bank have always had shadowy motives.

It’s not something that’s often spoken about, and for good reason. It’s a taboo subject that few people are willing to accept as being potentially true.

The World Bank hands out loans to nations that have little hope of ever repaying them. Why might they do this? Because the Bank never intends on getting its money back. It’s intention is to make nations subservient to their needs.

From that perspective, the World Bank is a political tool for the most part. The nations that govern it, like the US, use it get concessions from debtor nations. That includes, but isn’t limited to, pillaging resources. At the least, it puts pressure on these nations to vote on the ‘right’ side in global affairs.

They’re crooks, for lack of a better word.

Of course, all this is conjecture. There’s little proof to show for it. But it does add up if you think about it. Lending to the poor sounds like a noble cause. Yet that does sound like a good front for extortion racketeering, doesn’t it? It’s almost unheard of for the World Bank or IMF to get its money back. You have to ask yourself why that is.

What’s beyond any doubt however is that the perfect storm is edging closer. Where and when the dominos start falling doesn’t matter. And even if the crash holds off until 2017, we’re getting closer to something big. You can feel it. It’s been bubbling for the better part of the decade. There’s plenty of evidence for this. Yet, sometimes, even a gut feeling is enough to know that things are rotten.

Mat Spasic,

Junior Analyst, Markets and Money

PS: US interest policy is likely to dominate discourse for much of 2016. Yet as the Fed looks to increase rates, Aussie interest rates are likely to stay at record lows. That’s the verdict according to Markets and Money’s Phillip J. Anderson. He went against the mainstream, arguing that interest rates would remain low for decades…even as economists were predicting rate hikes.

Phil’s new report, ‘Why Interest Rates Could Stay Low for the 21st Century’, is a timely reminder of what the future holds. In the report, he warns that you won’t be able to count on your savings to fund your retirement. Inflation, stemming from low rates, will only eat into your reserves.

But there are ways you can benefit from this…provided you act now. Phil wants to show you the best way to invest in this low rate environment. That’s why he’s prepared a four-step strategy to help you boost your portfolio. You’ll learn exactly where to park your cash over the coming decades. And how this could help grow your wealth over time. To download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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