Continued fears of a slowdown in Chinese economic growth and falling commodity prices resulted in global share markets continuing to decline in September. As if these issues weren’t enough, Tony Abbott was ousted as Prime Minister with Malcolm Turnbull becoming the 29th Prime Minister of Australia.
For the month of September, the All Ordinaries Index declined 3.1% to close at 5,058.5 points. Global shares were all down with the US Dow Jones Index falling 1.5%, the London FTSE falling 3.0%, the Japan Nikkei 225 Index falling 8.0% and the Hong Kong Hang Seng Index falling 3.8% in September.
The issues facing financial markets at present are causing some to think “are we headed for a global recession”? While no one can rule out a global recession (because events somewhere could surprise), the world economy probably has enough going for it to avoid such a gloomy outcome.
No one denies that China, as 13% of the world economy, confronts challenges as it shifts from an investment and export led economic model to one driven by consumption. Its overriding task during this transition is to ensure that aggregate demand stays high enough to avoid a recession.
Chinese authorities have vast ability to do just that. Interest rates are well above zero and public debt is relatively modest, thereby allowing for fiscal stimulus. In addition, Beijing’s autocratic nature will prove an asset in an emergency (as it can enforce unorthodox remedies without worrying about the due process that can limit democracies).
Emerging markets excluding China, which comprise about 19% of the world economy, are expanding robustly enough. Emerging Asia, for instance, is in much better shape than it was before the Asia financial crisis in 1997. Today, even as currencies drop from India to Korea, emerging Asian countries have sounder financial systems, freer exchange rates, tame inflation, current-account surpluses, large foreign exchange holdings and sturdier government finances.
While many Asian countries face losing export sales to China (and currencies are falling accordingly), it’s more the emerging world outside east Asia that’s a bigger problem (namely, much of Latin America, the oil exporters, Russia, South Africa and Turkey). Still, considering emerging countries as a group, growth of 4.2% for 2015 (including China) looks reasonable.
The eurozone, which covers 17% of the world’s economy (to outsize China), is yet to regain its pre-crisis size. So it can be classed as in a depression. But the deflation-prone euro area is eking out growth (0.4% expansion in the second quarter) as low interest rates, falling commodity prices, an improving labour market and higher wages are aiding consumer demand.
While the ongoing Greek saga is a threat, the recent near-default and near-exit from the euro showed is that the country’s troubles appear to do little immediate economic damage to neighbours. The political damage tied to austerity and joblessness in Greece and elsewhere is spreading. But it will take a few more years to cause vast economic ructions.
Japan, for all its radical fiscal and monetary stimulus, might offer closer to nothing in terms of economic growth. Japan has zero inflation and its economy shrank 0.4% in the June quarter (because consumption and investment are spluttering, while China’s slowing is slowing export sales). But Japan these days is only 6% of the world economy.
Luckily for the world, the rest of the advanced world is thriving (especially the US, which covers 22% of the world economy and grew at a vibrant 3.7% annualised pace in the June quarter). US retail sales are buoyant, consumer confidence is touching 8 year highs and the jobless rate is at a 7 year low. US housing is humming, business investment is climbing and the government is injecting stimulus.
Exports play a relatively minor role in driving US growth (at just 13% of GDP compared with 50% for Germany) so the country is somewhat insulated from issues abroad. While wages are stagnant, productivity sluggish and there is some hidden unemployment, consumer spending is expected to help the US maintain its 3% annual pace of growth into 2016 and beyond.
Advanced economies less the US, the eurozone and Japan amount to 23% of the global economy. There appears a reasonable outlook for countries like Switzerland and the UK, for most of them will benefit from lower commodity prices – even if they are not so good for Australia (1.9% of world GDP) and Canada.
In summary, while it might be prudent to trim global growth forecasts for the next 12 months, it would not be wise to expect global growth much below the 3.3% that the International Monetary Fund forecast for 2015 (or the 3.8% it predicted for 2016). Given this, a global recession is considered unlikely.
In interest rate news, the RBA kept the cash rate on hold at 2.00% per annum in September (and is expected to do the same this month). The Australian Dollar continues to decline (falling 0.75% in the month), with 1 Australian Dollar currently buying 70.08 US cents.
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.