International Economic Week In Review: Downside Risks Increase

The IMF lowered its global forecast for 2016 and 2017.While they project growth for the US, EU and Japan, the rest of the world will experience weaker prospects.The report highlighted five key risks:

• A sharper-than-expected slowdown in China, which could bring more international spillovers through trade, commodity prices, and waning confidence.

• A further appreciation of the dollar and tighter global financing conditions which could raise vulnerabilities in emerging markets,possibly creating adverse effects on corporate balance sheets and raising funding challenges for those with high dollar exposures.

• A sudden bout of global risk aversion, regardless of the trigger, could lead to sharp further depreciations and possible financial strains in vulnerable emerging market economies.

• An escalation of ongoing geopolitical tensions in a number of regions, which could affect confidence and disrupt global trade, financial flows, and tourism. New economic or political shocks in countries currently in economic distress which could also derail the projected pickup in activity.

Commodity markets pose two-sided risks. On the downside, further declines in commodity prices would worsen the outlook for already-fragile commodity producers, and widening yields on energy sector debt threaten a broader tightening of credit conditions.

The World Bank offered a similar analysis for 2016:

Global growth again fell short of expectations in 2015, decelerating to 2.4 percent from 2.6 percent in 2014 (Chapter 1). The disappointing performance mainly reflected a continued growth deceleration in emerging and developing economies amid post-crisis lows in commodity prices, weaker capital flows and subdued global trade. Global growth is projected to edge up in the coming years, but at a slower pace than envisioned in June 2015, reaching 2.9 percent in 2016 and 3.1 percent in 2017-18.

What’s key to both reports is the public acknowledgement that downside risks have increased.   

   Once again, negative Chinese news started the week, as shown in this screen shot from tradingeconomics.com:

Four statistics – Q/Q GDP growth, industrial production, retail sales and fixed asset investment — were all between .1% and .2% below consensus estimates.Despite the slight misses, there were two bright spots:

The above charts of industrial production and retail sales show year-long consistency.IP vacillated between Y/Y growth rates of 5.6% and 6.8%, while retail sales growth fluctuated between 10% and 11.2%.  

BOE head Carney gave a speech in which he unequivocally stated the BOE would not be raising rates anytime soon:

Well the year has turned, and, in my view, the decision proved straightforward: now is not yet the time to raise interest rates. This wasn’t a surprise to market participants or the wider public. They observed the renewed collapse in oil prices, the volatility in China, and the moderation in growth and wages here at home since the summer and rightly concluded that not enough cumulative progress had been made to warrant tightening monetary policy.