With another round of revisions still to come, the fourth quarter of 2015 appears likely to be the slowest three months of global growth recorded since the euro area and Japan were both in recession in the latter half of 2012. This was principally a result of weak US and Japanese outturns which, at least for the former, is expected to prove temporary.
Turbulence in financial markets remains a potential threat
Indeed, far stronger growth is forecast for the first quarter of 2016 to the end of March with a nearly doubling of the pace expected by the developed countries led by the US reporting a sizeable rebound. The huge volatility in Indian data will boost emerging economies growth so that overall, world output should return towards more trend-like growth.
PMI data is hardly comforting, however with the latest global manufacturing report sliding to 50.0 from 50.9, the lowest since the depths of the euro debt crisis. It seems probable there may be some further modest developed markets led reductions to full year global GDP forecasts, with risks to the downside in the euro area, UK and Japan. In contrast, estimates for the emerging markets continue to hold up well although recessions in Brazil and Russia are proving protracted.
Looking forward, the outlook continues to underwhelm with drags on growth from across the globe. Bank of England Governor Mark Carney might believe there is still “substantial ammunition” available but the growth rates achieved to date, despite the scale of monetary support, hardly invokes confidence of a return to much stronger growth. Indeed, medium term forecasts for nearly all developed market economies have drifted lower in recent months while emerging markets will have to continue coping with China’s structural slowdown.
Turbulence in financial markets also remains a potential threat given the prospect of negative feedback loops from protracted weakness.
Outside of China, in general, governments have flunked the chance to commit to real structural reforms, such as Germany in the mid-2000s, and, while increased government spending is a possibility, debt levels in many countries remain ominously high. Near term, monetary policy will likely remain the first port of call unless economic conditions deteriorate markedly.
Asia Growth Surprises on the Upside
In general, Asia Pacific GDP growth surprised positively in the second half of 2015 whereas many predicted fairly dire outturns. Ex China/India, Asia Pacific grew by 4% with fourth quarter growth in Indonesia at 6.2%, Malaysia 6.3%, Philippines 8.2%, and Singapore 6.2%
While not sustaining such a pace of growth in early 2016, the decreased likelihood of US rate rises in 2016 is enabling a number of Asia economies to ease policy. Pressure remains intense, however, for those needing to restore credibility such as Brazil where growth forecasts continue to slip.
Elsewhere the South Africa budget, attempting to reduce the deficit, was relatively well received and the India authorities surprised positively by pledging to reduce the fiscal deficit to 3.5% in 2016 from 3.9%. This lowered bond yields and added to the likelihood of future rate cuts.
