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Analysis: Global economy: Bright spots and cloudy places
There have been several developments and key issues in the global economy that have had major implications in 2015
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There have been several developments and key issues in the global economy that have had major implications in 2015. At least three main issues emerged in 2015, and they will likely persist until next year or even longer. These issues are: 1) the continuing divergence of global economic performances, 2) a higher pressure on emerging market currencies and 3) deteriorating credit standing of European periphery countries, especially Greece.
The International Monetary Fund (IMF) is revising down its global economic growth outlook. IMF predicts an annual growth rate of 3.5 percent for 2015, lower than the October 2014 outlook of 3.8 percent annual growth.
Advanced countries are expected to experience faster growth at 2.4 percent in 2015 from 1.8 percent in 2014. On the flip side, emerging markets will grow at only 4.3 percent in 2015 from 4.4 percent in 2014. This outlook is based on downward trends in China and other emerging market economies, such as Russia, Brazil and Turkey.
The US was the lone bright spot with a projected growth of 3.1 percent in 2015 from 2.4 percent in 2014. The US largely offset the prospects of the weakening Euro zone and China. The US economy created 223,000 new jobs in June 2015, which lowered unemployment. The unemployment rate fell to 5.3 percent from 5.5 percent to mark the lowest level since the spring of 2008.
As a result, the US economy expanded moderately as labor market conditions improved. Policymakers reiterated that risks to the outlook for growth and employment are nearly balanced. The statement enumerated the usual list of factors that would aid in the decisions of the timing of the first increase in the funds target.
The Federal Open Market Committee member median projection of Fed Rate at the end of 2015 is 0.625 percent, which is projected to increase further to between 1.5 ' 1.75 percent at the end of 2016, and 2.75 ' 3.00 percent at the end of 2017. At the end of 2017, these projections still show the fed funds rate as below the longer-run rate of 3.75 percent.
As has been mentioned, several zones become cloudy places, and Greece is the most overcast. The IMF reduced its forecast for Greece's economic growth from 2.5 percent to zero in 2015. And it repeated its earlier suggestions that Greece needs debt relief in the form of extended repayment periods and lower interest rates. Greece will need an extra ¤50 billion (US$55 billion) over the next three years to stabilize its finances under the existing, disputed bailout plans.
On June 29, 2015, Standard & Poor's (S&P) lowered its foreign and local currency long-term sovereign credit ratings on Greece to 'CCC-' from 'CCC' with a negative outlook. S&P was also concerned about Greece's upcoming commercial debt payments, including ¤2 billion in treasury bills due on July 10, ¤83 million on
Japanese yen obligation, due on July 14, and ¤71 million in interest, due on July 17 on a three-year commercial bond the government issued in July 2014.
About ¤39 billion of Greece's total medium and long-term debt is commercial, representing 22 percent of GDP. All of the remaining 261 billion euro debt (excluding 15 billion euro in treasury bills) is owed to official creditors.
This negative outlook indicates that S&P could lower the long-term ratings to 'SD' within the next six months in the event of a distressed exchange or nonpayment of Greece's commercial debt, including treasury bills. However, S&P could also revise to a stable outlook if new financial support program were agreed upon, with policy conditions that satisfy both Greece and its official creditors.
The next cloudy places are emerging market countries. The IMF's latest world economic outlook argued that risks were rising for emerging markets, even as the recovery broadened in advanced economies. IMF said China's growth rate would further decline to 6.8 percent this year and 6.3 percent next year, significantly slower compared to 10.4 percent in 2010. Meanwhile, China's central bank lowered its 2015 GDP growth forecast to 7.0 percent from a previous estimate of 7.1 percent (December 2015).
Overall, China's economic conditions are worsening due to a faster-than-expected slowdown of exports and real estate investment, with the lowest indicators since the global financial crisis in 2008. Recently, the non-performing loan (NPL) ratio in China has been rising and commercial banks have become more cautious about lending, especially to producers of coal, steel, construction materials and companies involved in export-oriented manufacturing and real estate.
These emerging market economies have relied on international trade to support their growth over the past decade. But now those export-reliant developing countries are struggling to cope with weak demand across the globe as developed nations continue to struggle to recover from the ravages of the financial crisis.
Furthermore, borrowing costs are expected to rise as the Fed prepares to raise interest rates for the first time in nearly a decade. That prospect has also sparked a strong US dollar (USD) rally, tightening the squeeze on governments of developing countries and corporations that borrow USD but whose income is denominated by the local currency. Investors are increasingly questioning their ability to pay for ballooning obligations amid slowing growth.
Going forward, we remain cautious about the global economy in the short and medium term. Several volatilities are expected to linger in the upcoming year and will affect emerging markets.
The impact for Indonesia's economy will come in the form of low export and investment value. This is due to Indonesia's dependency on raw commodities-based exports. Having said that, continuing efforts for structural reform in Indonesia is a must to dampen high pressure from lower commodity prices. Furthermore, infrastructure development is required to attract foreign direct investors. Those actions will shield Indonesia's economy from the impact of further global uncertainties.
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The writer is a junior economist at the office of chief economist (OCE) of PT Bank Mandiri (Persero) Tbk.
