Another Disappointing Year for the Global Economy

As we enter the final few weeks of 2015, it is worth looking back on the past year to determine which developments and trends have had the largest impact on the global economy over the past year and how they will impact the global economy in 2016 and the years beyond.  Overall, the global economy has been continuing its recovery from the financial crisis of 2008 and 2009, but unfortunately, this recovery has been tentative at best and many of the world’s leading economies have suffered their own severe crises in recent years, many of which continued in 2015.  Moreover, the world’s leading engine of global economic growth in recent years, China, has shown increasing signs of weakness as its economy transitions from one driven by exports to one increasingly driven by Chinese consumers.

In terms of economic growth, the global economy has found itself stuck on growth rates of just above three percent for the past four years, with global GDP growth for 2015 estimated at just 3.1%.  This prolonged period of relatively sluggish economic growth is the longest such period of sluggish growth since the early 1990s and reflects a number of disappointing performances by many of the world’s leading economies.  Among developed economies, the United States economy continues to expand, but has now failed to reach an annual GDP growth rate of at least 3% for the past decade, the longest such period of such low growth in the US in the country’s history.  In Europe, some peripheral economies such as Britain, Spain and Poland grew at a healthy pace in 2015, but other leading European economies such as Italy and France continued to struggle, while the German economy slowed in 2015 due to weaker export markets.  Finally, Japan’s economy struggled mightily over the past year as the stimulus programs of the past years no longer boosted domestic demand levels, while Asia’s other developed economies struggled as a result of weak export demand.

While developed economies struggled to return to pre-crisis levels of growth, the situation for emerging markets in 2015 also proved to be a drag for the global economy.  Most of the attention over the past year has been on China, where GDP growth rates have fallen to below 7% as export revenues fell sharply and the country’s share prices fluctuated wildly.  Nevertheless, China and Asia’s other leading emerging markets, most notably India, remained the leading drivers of global economic growth in 2015.  Outside of Asia, the picture was much more grim, with many of the world’s leading non-Asian emerging markets suffering major setbacks in 2015.  For example, two of the BRICS group of large emerging markets, Brazil and Russia, fell into deep recessions in 2015.  Moreover, low commodity prices led to much lower rates of growth for key emerging markets in Latin America, Africa and the Middle East.  Altogether, many of the emerging markets that were the leading drivers of global economic growth in the wake of 2008-2009’s financial crisis are no longer providing much of a boost for a global economy in search of new drivers of growth.

While global economic growth rates have been stuck at little more than 3% per year in recent years, global trade and investment levels are even more depressed and it appears that both will decline again in 2015.  In the past two decades, global trade and investment levels have typically exceeded global economic growth levels by a healthy margin, but this trend has come to a sudden halt over the past few years.  Moreover, while a deal was reached on the ambitious Trans-Pacific Partnership (TPP) including the United States, Japan and ten other Pacific Rim countries, other key proposed trade and investment deals, including the TTIP deal between the US and the European Union, appear to be losing momentum.  Moreover, 2015 witnessed growing support for protectionist movements on both the political right and left in many areas of the world, a trend that could continue if global economic growth rates remain stagnant.

Looking ahead, a number of economic developments and trends from 2015 will carry over into 2016 and beyond.  First, economic growth rates are forecast to remain near the 3% level in 2016 and 2017, as growth slowly rises in the US and Europe, but slows in China and remains depressed in many other emerging markets.  In 2016, India will cement its position as the fastest-growing large emerging market, a position it attained in 2015 for the first time in modern history.  Meanwhile, this relatively sluggish growth will lead to more pressure being placed on economic policy makers, as they are called on to do even more to stimulate growth in a world where the opportunities for growth have narrowed.  Finally, the impact of geopolitics on the global economy could increase significantly in 2016, as geopolitical tensions between many of the world’s leading economic powers adds to the risks facing the global economy.