WORLD ECONOMY AND EMERGING COUNTRIES: THE END OF THE FINANCIAL TANGO
As of the end of April, the world economy is going to have
great difficulty to reach 3.5% yearly growth as forecasted by the IMF in its
latest report. Despite all these favorable conditions, why doesn't the economy
recover?
The indicator most closely followed by the world economy on
a monthly basis is the JP Morgan global composite PMI index: it has declined by
0.6 on year-to-year basis and reached a point near the six month zenith with 54.2
but 54.2 seems to be inadequate. Oil prices have declined by 30% since the
beginning of the year, the Fed no longer prints more money. But more than 30
central banks have filled his gap. The tightening period of budgetary policies
has taken an end.
Everyone can sense a number of reasons. For example, the US
economy has left behind a terrible 1st Quarter due to the temporary
shocks, and could not contribute enough to the global demand. China has no
longer the same power. Japan is still trying to recover from the impact of the
increase in VAT introduced last year which had a negative effect upon the
demand, developing countries are delaying the supply-side reforms, etc.
But these are very superficial explanations; a more
structured and somewhat alarming causes lie beneath. First, the global
production chains are no longer prolonged. That is, the production does not diversify
from one country to another, in a sense the globalization has slowed down and
the world trade has started to grow slower than the world output. The export-based
economies such as South Korea, Taiwan and China are the ones that suffer the
most from this. Even worse, the US began to import manufacturing to his country
thanks to cheaper oil and natural gas and the multiplier effect has been
reduced.
The second reason for the sluggishness of the world economy
was due to the slowing down in the global trade and liberalization of the
investment and capital flows. With the countries returning to the
protectionism, the world economy is growing slower.
The third reason is the cheapening of oil that has not yet been
fully reflected in consumer prices. In some countries, the state confiscated the
cheap oil bonus through the budget savings, consequently the oil prices did not
drop enough due the appreciation of the Dollar Index, so the consumer who has
not prospered ultimately does not spend. In parallel with this, the global
liquidity did not expand enough. Because the rich OPEC and Russia have seen
their petrol-dollars evaporate and this has sucked some of the additional liquidity
that ECB’s monetary expansion had provided.
But the biggest reason is the evolution of the global trade
credit system. After the Lehman crisis, the banking supervisors of major
countries have been very successful in their duties. The banks were denied
giving risky loans. As a result, the commercial loans are no longer supporting
enough the world economic growth. This weakness has been partially offset by
the inflating dollar and euro-denominated private sector bond market but for many
SME, nothing can take the place of the commercial loans. Rather, a series of
giant banks are now narrowing their operations in the emerging countries and
are turning to more profitable areas and the weakness in the growth of this
region seems to be as permanent.
What will happen in the future? The cyclical recovery of US,
Japan and China's spring-summer is inevitable (if of course China does not participate
into this). To these, the secular recovery of the euro-zone and developing
countries benefiting from the partial rally in commodity prices will participate
and in the coming months a more optimistic global landscape will be shaped. However,
the world economy will continue to produce light output in the 2015-2016 period.
What will be the repercussions upon the developing
countries? This output deficit will delay the Fed’s decision to increase the
interest rate by keeping the inflationary pressures weak or the expectation
that it will keep the interest rates of US-German government bonds low is a
clear illusion. The second noticeable feature of the world economy is the
shifting of the recovery’s main axis from the emerging countries to developed
countries. That is, the inflationary pressures will this time begin to appear
first in the US and the EU. If the rise in oil prices continue, the emerging
countries may join this towards the end of the year. This scenario poses a
series of adversities for the emerging markets. As the growth does not occur to
its full consistency, the rise in the yields of US-German government bonds
which set the precedent for the entire world, is negative for the emerging
countries’ fixed income securities. Second; with the closing of the growth gap
between emerging countries and developed countries in favor of the second, the
speculative capital will move to the second and has started already. Third; in
the period when the Fed will raise the interest rate, the shocks in the
emerging countries that did not reinforce sufficiently their real and financial
structures may take place much harder than expected.
Then the following questions should be asked: is the 10-year
reign of emerging countries over? Despite all the generosity of the ECB-BOJ and
now PBOC together with the historically lowest inflation rates and bond yields,
are we entering into a 5-year period where the speculative capital is not entering
into the emerging markets and the financial crisis as well as recessions will
start to show up again?
