The raft of economic data released this week calls into question the whole global recovery meme. In spite of estimates of another year of single digit global growth, downside revisions are becoming increasingly commonplace across even the relatively strong economies. No country is immune or insulated from the trade downturn, regardless of being an exporter or importer. The evidence of a protracted slowdown is clear considering the persistent commodity deflation and downward momentum in manufacturing purchasing managers’ indices and industrial production numbers. Although there are some outliers to the broad-based slowdown, most major industrialized nations and emerging economies are facing similar conditions. Demand for developed nations remains anemic as consumers continue to deleverage amid the worrying outlook. Oversupply conditions faced by emerging economies have also had drastic implications for the growth outlooks. Commodity producers in particular have been hard hit by the developments and are unlikely to recover until prices rebound from the slump experienced over the past year.
Taking into consideration current developments, it is hard to imagine a scenario in which any Central Bank is racing to increase interest rates. The one clear exception would be in the case of a hyperinflationary environment and run on a sovereign currency, the likes of which was experienced by Russia late last year. Nevertheless, as the United States and United Kingdom gear up for a potential liftoff in interest rates, much of the latest external developments stand in the way of progress on these policy adjustments. While structural underemployment remains a very real concern in the American economy taking into account the continued decline in labor force participation, the UK is starting to feel the impact of worsening external financial conditions. Even though the United Kingdom serves largely as a hub in the global economy, its insulation from global developments is not assured. The drop in crude oil prices has dramatically impacted profits from North Sea production and the local economy is starting to slow despite the benefits of below-trend inflation. Expectations for 2016 are still heightened based on the latest remarks from Bank of England policymakers. However, tomorrow’s MPC vote will provide evidence of the merits of a more hawkish tone considering the present state of the global economy.
Global Economy Tipping Into Recession
Market Trends - 09/09/2015