A Lack of Confidence Threatens the Global Economy

One of the biggest drags on the global economy continues to be a lack of confidence in the economy, particularly among businesses and investors.  For example, business confidence levels remain perilously low in most areas of the world, shaken by an uncertain political climate and the lingering effects of the global financial crisis.  Likewise, investor confidence levels have been hit hard by the rising levels of uncertainty surrounding nearly all of the world’s largest economies.  Fortunately, consumer confidence levels have risen, or at least held steady, in most of the world’s leading consumer markets, providing for much of the growth in the United States, China and other leading economies in recent months.  Now, a number of factors, some new and some old, are coming together at the same time and this is bad news for a very fragile global economy that is just one crisis of confidence away from another serious downturn.

Without a doubt, business and investor confidence levels are relatively weak in most areas of the world as we head into the final nine weeks of 2016.  Much of this is the result of the great deal of political uncertainty caused by the highly unusual presidential election in the United States, the rise of protectionism, Britain’s decision to withdraw from the European Union and the ongoing unrest across the Middle East and North Africa.  In addition, the relatively slow growth being recorded in developed economies and the struggles of many of the world’s leading emerging markets, including China, is adding to this decline in business and investor confidence.  Mix in a great deal of uncertainty about the political and economic climate in 2017 and it is easy to see why businesses and investors are spooked.  Together, these factors have led to lower levels of business spending and investment and this has been the leading reason why global economic growth is set to be lower this year than at any time since 2009.

Fortunately for the global economy, consumer confidence levels have remained relatively robust and easily exceed their business and investor counterparts.  As a result, consumer spending has provided for much of the growth for the US, Chinese and other leading economies this year, each of which would have suffered a much sharper downturn had it not been for relatively high levels of consumer spending.  At the moment, consumer confidence levels appear likely to remain strong into next year, but additional uncertainty, either political or economic, could have a negative impact on consumer sentiment.  Should this occur, the main pillar of growth for most of the world’s leading economies would disappear, resulting in a very sharp decline in global economic growth rates in the coming months.  As a result, governments and central banks are moving rapidly in a bid to maintain consumer confidence levels in their countries, knowing that this is the key to boosting growth rates over the near-term.

Since the financial crisis began in 2008, business, investor and consumer confidence levels have been fragile at best, particularly now that emerging markets have been unable to offset the reduced growth opportunities presented by developed economies.  All of these sectors had hoped that the global economic climate would have improved by now, eight years after the start of the financial crisis, but are now losing confidence in global growth prospects.  Furthermore, the deterioration of the international political climate in recent years is adding to the downward pressure on confidence levels in all sectors of the economy.  As a result, the global economy is now just one serious crisis away from another severe downturn, one that would bring an end to the admittedly sluggish recovery that has been moving ahead in fits and starts since 2010.  Naturally, the world’s more fragile economies are most at risk from this lack-of-confidence-induced downturn, but all countries would suffer in some manner.  This just reinforces the fact that we are living in very uncertain times, as political and economic risk levels rise to dangerous new heights.