No matter what the story, this are almost always some losers and some winners. However, it really didn’t feel this way this week. The aftermath of the Paris terrorist attacks has left the Western world universally in a state of great fear and deep sorrow. The slowing growth of global trade implies that from our economic models of trade and the downward revision to the global growth prospects suggests that everyone can be made worse off. Even if this is the case, there were reasons to happy worldwide. as Myanmar made its first steps towards becoming an open democracy however unfair the election process might be and oil appears to be set for several more years of record low prices.
The pessimism keeps on coming
- What happened? The OECD this week revealed that it had cut its growth forecast for the world economy, from 3% to 2.9% in 2015 and 3.6% to 3.3.% next year. It has strong evidence to support this prediction in the form of the sluggish trade data seen this year, which is only expected to grow in total by 2% in 2015, compared to the much higher rate of 3.4% last year.
- What’s behind this story? The main reasons for such weak economic growth and trade growth is rooted in the emerging markets; as China transitions from investment-focused model to becoming more consumption-orientated, this has had a major implication for Chinese trade which is contracting significantly. For example, in October, Chinese imports fell by almost 20% compared to a year before and its exports were 7% lower than it was a year ago. At the same time, with this year’s collapse in commodity prices, partly caused by China’s falling demand for natural resources as well as a global oil glut, emerging markets are finding their terms of trade rapidly shrinking and this matters when emerging markets are as indebted as they are at the moment.
- Why is this important? This new warning from the OECD adds even more weight to the pessimistic message of the IMF from just weeks ago who said that the global economy was set to grow at its slowest rate since the financial crisis began. In fact, the Economist paints a much more gloomy picture; it notes that with debt-to-GDP ratios in emerging markets having risen from 150% in 2009 to almost 200% currently, the capital outflows that emerging markets are set to face in the coming years make the possibility of another debt crisis much much greater and with the global economy just recovering from the last one, who knows how severe the scars will be this time.
No end in sight
- What happened? On the topic of falling commodity prices, after news that global oil inventories are at record highs, the trend of rockbottom oil prices does not look like it will be reversing any time soon. The International Energy Agency revealed that it put estimates of oil stockpiles in developed countries at near 3bn barrels, roughly equal to a month’s supply of global oil production. Although Brent crude oil is trading at near historically low levels of around $44 a barrel, this new data concerning the extent of the oil glut suggests the oil price may continue to stay this low at least until the turn of the new decade.
- What’s behind this story? On the supply-side, Opec, the well-known cartel of oil-producing countries, is at record levels of oil production as Saudi Arabia has forgone its policy of cutting production through quotas to keep oil prices afloat and is instead trying to fight tooth-and-nail with its other Opec members as well as Russia to sell more oil to China and Europe. On the demand point of view, although demand for oil is rising in response to lower prices as one would expect, such that the IEA expects demand to grow by 1.9% this year as opposed to 1% in the past decade, demand for oil is on a downward trend for structural reasons as China is moving away from energy-intensive growth and developed countries move towards more environmentally friendly energy sources.
- Why is this important? The effect of oil is simply put, omnipresent. On a micro level, the basic need for oil for most forms of transport means it is a key cost concern for almost all firms and consumers obviously benefit from lower transport costs. But the macro effects are even more important; we have already seen the effects of low oil prices devastate several economies across the world (to name but a few, Brazil, Australia and Canada) but as foreign reserves continue to shrink and as the potential for an even lower oil price grows, one must worry about how the global economy will respond to a prolonged situation of low oil prices
‘Too big to fail’ for too long?
- What happened? This week, the Financial Stability Board (FSB), the organisation responsible for co-ordinating banking regulation across the G20 economies that is chaired by the Bank of Governor Mark Carney, issued new guidelines for the world’s biggest banks to follow and demanded that they raise an additional $1.2tn to meet the requirements. The big change concerned Total Loss-Absorbing Capacity (TLAC), which is the amount of equity and at-risk debt that the bank has available to it as the FSB is demanding that banks hold a greater proportion of their risk-weighted assets in TLAC, as high as 16% by 2019 and 18% by 2022.
- What’s behind the story? The drive behind these new regulations is to prevent the bank runs of the past where depositors were at grave risk of losing their money once the bank suffered severe losses and this in turn created a self-fulfilling prophecy as depositors withdrew their money in fear and gave banks even less cash to work with. These changes mean that there will be a new type of debt being issued that will be amongst the first assets to be liquidated when the bank faces liquidity problems whereas traditionally, equity holders are the first to lose out when bank losses occurred, acting to further protect depositors.
- Why is this important? Even now, the scars from the global financial crisis of 2008 still remain across the global economic landscape; interest rates are still at rock-bottom, as a reminder of the attempts by central banks to stimulate their economy. In this view, the FSB is keen to avoid any repeat of that scenario from happening ever again and they are specifically applying these measures to Globally Systematically Important Banks (G-SIBs), that in other words are banks which have been deemed ‘too big to fail’.
In other news:
- The world was in mourning this weekend as Paris was subject to a deadly string of terrorist attacks. In a series of 7 attacks instigated by at least 7 terrorists on behalf of Islamic State, at the time of writing, almost 130 people had been killed with over 350 being injured. In an announcement very shortly after the attacks begun, the French President Hollande announced that the country ‘was at war’ with Islamic State for what was the second most deadly terrorist attack in a Western city since 9/11
- There was a major development in Myanmar as the country held its first freely contested election in 25 years and Aung San Suu Kyi, who was both placed under house arrest for 15 years and awarded the Nobel Peace Prize for her efforts in trying to bring an open democratic system to Myanmar in 1990, was the undoubted winner of the election. Her party, the National League for Democracy, won a significant majority in the election despite it being a unfair process (i.e. a quarter of the parliamentary seats are reserved for the military) and although the army-drafted constitution prevents her from being declared president of the country, the support that the electorate have given her make the position of the armed forces who effectively control the country untenable.
- The UK economy replied to the US’ strong jobs report last week with the release of its impressive labour market data this week. In Q3 2015, the headline unemployment rate had reached 5.3%, the lowest rate for 7 years and even more impressively, the proportion of labour force that was employed reached a record high of 73.7%. The only blip in the tranche of good news was that the earnings data was surprisingly weak as pay excluding bonuses had risen by 2.5%, the slowest rate since the first quarter of 2015.
- On mainland Europe however, a very different story was being played out; the Eurozone as a whole was revealed to have grown by a lacklustre 0.3% in Q3 2015, down from 0.4% in the previous quarter. All the big European economies had reported mediocre growth rates as Europe’s economic powerhouses of France and Germany grew by 0.3% and the Italian economy had grown by just 0.2%. It was this disappointing data along with ‘signs of a sustained turnaround in core inflation have somewhat weakened’ that pushed Mario Draghi to hint at more aggressive monetary stimulus to be introduced in December.