Last year, political turmoil managed to extend into the already embattled global economy. Voter’s in Britain and the United States upended the global political and economic landscape. This year may prove to be just as tumultuous as 2016. Although international markets have been taking a beating from every direction for the past two years, the US economy partially bucked the global trend and continued to recover at a moderate rate. Economic growth cooled this year due to the strong dollar and weak productivity gains, but data from the past year has shown large labor and wage gains, improved domestic spending and rising inflation across most of the United States.
In 2015 a multitude of factors came together to cause the Chinese stock market crash. The turmoil was a sign of trouble ahead. Thereafter, global trade and consumption turned downward and have grown sluggishly ever since. Additionally, issues leftover from the global recession have left many countries with high levels of debt. In reaction to the economic stagnation, economic policymakers have introduced large scale monetary easing policies, such as interest rate cuts and quantitative easing, with varying degrees of success. All of the major economic regions of the world are facing unique challenges this year.
In China, the country is facing shrinking manufacturing activity, an overheated property market and staggeringly high levels of corporate debt. China’s economy is now growing at the slowest rate in more than 26-years and is expected to slow further in the coming months and years. Additionally, both foreign and especially domestic investors are rushing to pull money out of the country and invest elsewhere. In response, the People’s Bank of China (PBOC) has gone to extreme lengths to artificially lower the value of the yuan against the dollar, as the above-mentioned capital outflows have put pressure on the valuation of the yuan. Since June 2014, the PBOC has spent more than $1 trillion to manipulate the value of China’s currency by selling foreign exchange reserves. As the country attempts to transition from a manufacturing-based economy to one focused instead on services, cracks in the Chinese economy appear to be widening.
In the United Kingdom, economic and political uncertainty surged following the outcome of the EU referendum vote. British voter’s decision on June 23 of last year to leave the European Union caused international markets to panic, sending the pound’s value down to a 31-year low. Although the stock market in London has since recovered, the pound’s valuation has not. Shockwaves from the pound’s sudden depreciation are finally catching up to the rest of the British economy. Factory prices and manufacturing costs in Britain are growing rapidly and putting pressure on the spending power of the country as a whole. Although Britain’s economy expanded faster than its G7 peers last year, the Bank of England expects GDP growth to nearly halve this year. Furthermore, Article 50 has yet to be invoked by the British government, meaning Britain has yet to “Brexit”. Once the UK actually leaves the European Union, the British economy may slow even further. To add further to Britain’s economic woes, it appears that London’s status as one of the world’s financial capitals may be damaged. International banks and investors are worried that Britain’s official exit from the European Union will also mean the elimination of special financial and trade rights that benefit financial institutions headquartered in London. In response to the vote, many of the world’s largest banks announced that they would shift staff and operations outside of Britain.
In the European Union, the entire economic bloc is struggling to move forward together. The global financial crisis didn’t just bankrupt Europe’s financial institutions and homeowners, it also nearly bankrupted several Eurozone nations. The most famous of these bankruptcies was Greece, which made international headlines for nearly collapsing the euro and the European Union. Policymakers in the EU decided to enforce strict austerity measures (budget cuts) to lower debt across the Eurozone while also stimulating the economy through large asset purchases at the European Central Bank. The end result has been low growth, negative interest rates and a significantly devalued euro relative to the dollar. Although there are some signs of a recovery in the Eurozone, especially in Germany, major financial issues continue to plague Italy and Greece, while economic stagnation and political uncertainty exist throughout the bloc. Additionally, social and political pressures are mounting across Europe, which threaten to unravel European unity and the euro.
The Japanese economy has stagnated for over two decades now. Following the end of Japan’s economic miracle, the country quickly transitioned into a high debt, low growth market. Some Japanese companies have flourished, while others have reeled in the face of global competition. Many of Japan’s economic issues are connected to the country’s previously low and now negative birth rate. As of 2015, official Japanese records show that the country’s population is shrinking. That means less workers, less renters, less consumers and less people active in the economy. Japan, an export reliant country, has struggled to maintain shipment volumes as well. The Bank of Japan, the country’s central bank, has enacted various monetary policies with varying degrees of success. Economic forecasts for Japan are mostly the same as they’ve been for some time; low growth, high debt and continued dependence on global trade.
Much of the economic plight felt in major economies of the world is also felt in emerging markets and other small-but-advanced economies.
In South Korea, a political scandal has rocked the country and has sparked widespread protest. The scandal includes President Park Geun-hye and various large and influential corporations in South Korea, including Samsung CEO Lee Jae-yong, who was recently indicated on bribery and embezzlement charges. Additionally, South Korea companies are facing international demand issues. Finally, political tensions with China are on the rise due to the deployment of the US THAAD missile defense system, prompting a backlash in China against South Korean goods, celebrities and companies.
Another issue that has extended into emerging markets is the vast depreciation of commodity prices since 2011. For several years now, many major commodities such as oil have seen a sharp deterioration in price. For example, iron ore and other metal prices have plummeted since 2011 as demand from China weakened. Both Brazil and Australia have major mining sectors that provide a significant amount of jobs and economic growth. The downturn in iron ore prices has lowered corporate profit, economic growth and employment in both Australia and Brazil. Both nations are hosts to some of the biggest names in mining and both nations have seen significant economic downturn due to weak iron ore prices for several years now.
Oil producing nations, such as those found in Organization of the Petroleum Exporting Countries (OPEC), have also struggled. Starting in 2014, oil prices begin to fall from a rather high peak. In June, 2014 oil prices floated around $108 a barrel. By July of 2015, oil prices were less than half at around $48 a barrel. In January of last year, oil prices finally bottomed out near $29 a barrel and then began a slow trek upwards. In the first quarter of 2017, oil prices have floated around $50 a barrel. This sharp decline in oil prices has resulted in a severe pullback in business investment, government revenue and economic growth in various nations. Most of the major oil producing nations – such as Saudi Arabia, Russia, Iraq and Nigeria – are facing severe issues such as economic contraction, increase debt defaults, significantly lower corporate profits and currency depreciation. Venezuela, a country heavily reliant on oil exports and revenue, may very well see a complete collapse of both its government and economy this year.
The major economies mentioned above – China, the United Kingdom, the European Union and Japan – account for nearly half the world economy. The United States, which is currently the world’s largest economy with a nominal GDP of $18.562 trillion, is nearly one-quarter of world GDP. These countries together represent the vast bulk of the global economy and each of these countries are facing a myriad of domestic issues. But while economic strife is felt across the globe, one nation seems to be breaking the trend.
At the end of 2015, as other countries were desperately slashing interest rates, the Federal Reserve raised its federal funds rate, the baseline interest rate used by banks in the United States. As a matter of general policy, central banks such as the Federal Reserve will usually raise interest rates when an economy is performing well. Correspondingly, central banks generally lower interest rates to stimulate growth when an economy is showing weakness. For over a year now, the US economy has continued to recover and interest rates are beginning to rise. At the same time, in other high GDP countries of the world, central banks are slashing interest rates and injecting cash to stimulate economic growth.
It is difficult to estimate how the global economy will look in the future. As detailed by the International Monetary Fund’s report A Shifting Global Economic Landscape, global growth could pick up pace this year and next. In its report, the IMF noted a ‘dispersion’ of outcomes, citing the vague shift in economic and trade policy of the new US administration. While President Trump and many of his advisors have talked openly about economic policy, much remains a mystery. Additionally, because of the size of the United States economy, any change large or small to policy will have far reaching ramifications. These policy changes combined with the uncertainty of the details of the new administration’s economic policy make it difficult to come up with accurate estimates.
But the IMF also noted that some of the economic policies already announced by the new administration will act as a fiscal stimulus. This stimulus will come in the form of increased investment in infrastructure and broad tax cuts for nearly all Americans. The IMF also noted that the strong performance of the US economy is the last half of 2016. The US labor market has advanced considerably since the subprime mortgage crisis and consequently analysts expected increased wage growth. Finally, research from professional services firm Deloitte suggests that the US manufacturing sector will outpace China’s by 2020, due to a multitude of factors. With wind at its back and projected stimulus incoming, GDP growth in the United States will likely accelerate through the end of 2018. Americans can expect moderate consumer price growth, higher interest rate payments, more job opportunities and possibly higher pay.
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