DOHA: The slowdown in global GDP growth in Q4, 2015 is concerning. However, the scale of the selloff in global equity markets seems to point to a relatively high risk of recession in developed markets and a hard landing in China. The selloff appears overdone, given that the current outlook for global activity is not as grim as the reaction of financial markets suggests, QNB’s weekly ‘economic commentary’ noted yesterday.
So far this year, global stock markets fell around 11 percent. The losses were concentrated in China (down 16 percent), but emerging markets, Europe, Japan and the US all faced declines of 9 percent to 13 percent. These losses came despite expectations that the spillovers from events in China will be limited. Goldman Sachs estimates that a hard landing in China combined with a sizeable renminbi depreciation and tighter Chinese financial conditions would only lower GDP growth in the US, Europe and Japan by 0.2-0.3 percentage points. This begs the question, why have equity markets fallen so widely and so sharply?
There is some evidence that global economic activity softened at the end of last year. Overall, world real GDP growth in 2015 is now likely to come in below 3 percent, down from 3.1 percent a few months ago. Some of the largest recent downward revisions to real GDP growth have been in the US. Estimates for Q4 2015 real GDP growth have been revised down from over 2 percent at the end of November to 0.5 percent in the most recent Bloomberg survey. It is both US industry and consumers that have been underperforming. The latest data release for industrial production and retail sales for December showed contractions of 0.4 percent and 0.1 percent respectively.
In fact, industrial production appears to be going through a global slump, leading to significant downward revisions to GDP growth in the world’s big manufacturing nations. Germany is only expected to have grownby 0.5 percent to 1.5 percent in Q4 2015, compared with market expectations of over 2 percent two months ago.
As a result, much hope for global growth this year is pinned on the consumer. A number of forces should be supporting consumption. Lower oil prices should have freed up income for spending. In the US, the focus of global consumption, a strong labour market, a recovery in the housing sector and strong consumer confidence surveys, suggest that consumers should be splurging. However, recent weakness in retail sales in the US, the Eurozone and China suggest that households are mostly saving recent windfalls, the research note said.
“A critical factor supporting growth this year could be looser monetary policy from global central banks. The continued rout in global oil and other commodity markets means that inflation is likely to remain low this year. This will create room for central banks to ease monetary policy, supporting growth.”
The Peninsula
