The Leading Threats to the Global Economy
As we enter the latter part of 2015, it is becoming clear that overall levels of global economic growth will once again fail to accelerate, with global GDP growth hovering around 3.4% for the fourth consecutive year. In fact, it is becoming clear that, despite a more robust recovery in the United States, the global economy is now in the midst of a period of prolonged sluggish growth. While the situation today is certainly better than it was at the height of the debt crisis, it is not the solid recovery that most major economies had anticipated. Moreover, the level of economic risk around the world is rising, not falling, raising fears that another significant downturn for the global economy could be around the corner.
Of the threats that are raising risk levels for the global economy, none is greater than the current economic volatility that is shaking the Chinese economy this year. This is due to the fact three decades of near double-digit economic growth in China has resulted in that country emerging as the leading driver of global economic growth in recent years. Now, with growth rates slumping and uncertainty surrounding China’s domestic market and its export competitiveness, China’s ability to drive global growth is being threatened. Nowhere is this being felt more dramatically than among the world’s leading commodity exporters, who have seen their high rates of economic growth evaporate among falling demand levels in China. Meanwhile, Chinese economic growth fell to 7.0% in the first half of this year (and was likely even lower) and is expected to fall further in the second half of this year. While a hard landing remains unlikely, the risk of such a development has nevertheless risen in recent months and this has been enough to introduce panic to the markets in China and around the world.
Given China’s size, its impact on the global economy is far more substantial than that of any other emerging market. Nevertheless, the worsening situation in many of the world’s largest emerging markets has become one of the leading risks facing the global economy this year. While the Indian economy has managed to stage a recovery over the past year, other large emerging markets such as Brazil, Russia, Mexico and Turkey have struggled to generate any growth. In fact, Brazil and Russia, the world’s 7th and 10th largest economies) remain mired in deep recessions that appear likely to continue in the months ahead. Moreover, growth rates have trended downwards in emerging markets around the world and this is leading to increasing competition for exports (such as moves by many emerging markets to weaken their currencies) and to anemic increases in domestic demand in markets that were expected to become more important drivers for growth in the years ahead.
Finally, sluggish growth in Europe and Japan continues to weigh heavily on the global economy, as the hopes for more robust recoveries in these developed markets have not been realized. In fact, the risk that growth levels slow over the near-term in both economies has risen, with economic growth forecasts for 2015 and 2016 being downgraded in both markets. This is due to the fact that domestic demand remains constrained in Europe and Japan by unfavorable demographics and the lingering effects of the global economic downturn. Furthermore, as export-dependent economies, Europe and Japan are at risk from the actions of other leading exporting economies to improve their own export competitiveness. Finally, it is becoming more apparent that the growth ceilings of both Europe and Japan have fallen further in recent years, with neither of these large economies capable of being able to sustain high rates of economic growth for a prolonged period of time. As a result, it is becoming much more difficult to see where the impetus will come from for a significant increase in global economic growth in the years ahead and this is adding to rising levels of risk for the global economy.