Economic Downturn

GLOBAL Economic DOWNTURN

WHAT IS ECONOMIC DOWNTURN?

• An economic downturn suggest the rate of economic growth is slowing down and possibly entering into recession.

• Key Features include : Negative or very low economic growth Rising unemployment Falling asset prices – shares and house

prices Low confidence and falling investment Hight inflation.

China’s devaluation of Yuan September 2015

• China experienced s growth rate slowest in a quarter century.

• China’s slump spread across Asia as exports fell and consumers cut back on spending

• Yuan to a four-year low, as a result heralded a tidal wave of cheap goods from Asian countries as they followed suit.

• Slowed down overall growth of world economy

Situation :

Reason : • To maintian monopoly in world trade.• To boost its exports in international

market by providing exporters with a cheaper currency.

• To maintain its competitiveness in global market as a manufacturer.

However, China wants to maintain a strong currency to prevent capital outflows that may weaken the country’s economy further.

Oil and commodity price slump2014 - 2016

• Global market flooded with surplus oil supply.

• Brent Crude price fell to $30/barrel in Q1 of 2016 from $125/barrel in mid-2014.

• Other commodities, like cement, aluminium etc. prices fall too.

• OPEC sticks to current production levels.• Investment in oil and gas exploration and

capacity expansion fell.• Victims of fall in price include Russia ,Gulf

and Latin American states.

Situation :

• Fall in growth rates of emerging markets.

• Rise in domestic oil production in western states.

• Unwillingness of OPEC members to cut production, amid fears of market share loss.

• Introduction of Iranian oil after sanctions being lifted.

Reason :

GREEK DEBT CRISIS2010 - 2015

• Greek trade deficit and budget deficit rose to 15% of GDP . • Greece could no longer borrow to

finance its trade and budget deficits.• Greek wages fell nearly 20%  and

unemployment rose above 25%.• Reduction in income and GDP,

resulting in a severe recession.

Situation :

• Greece shut out from borrowing in financial markets.

• Greek fiscal mismanagement and deception increased borrowing costs.

• Widespread tax evasion. State collected less than half of the revenues due in 2012.

• Governmental spending higher in non-growth sectors than growth-stimulating sectors.

Reason :

Global stock downsurge2015 - 2016

• Stock fall in China caused havoc in global stock market.

• The MSCI All-Country World Index, which measures major developed and emerging markets, fell into a bear market, with its decline from early last year now totalling more than 20 percent.

• China government intervention to prop up the market by buying shares the following day did little to restore investor confidence.

• The circuit breaker was placed by chinese to temper the market but instead caused a wave of selling of stocks.

Situation :

• The drop is linked to poor growth and economic figures from China.

• Sharp devaluation in the Chinese currency as a sign that the authorities are becoming increasingly rattled about the nation’s ailing economy.

• P/E ratio indicates that market is overvalued, which made stockholders very nervous.

Reason :

FUTURE OUTLOOK

1) U.S growth will remain solid• Underlying fundamentals of the US domestic

economy remain sound.• Consumer spending has been increasing at a rate

of around 3% over the past year and is predicted to keep growing at the same pace in 2016

• There were three negative influences on the economy in 2015: an inventory cycle, the collapse in energy sector investment, and the impact of a strong dollar and weak global growth. Two of these will ease in the coming year.

• The growth rate of the US economy can be expected to remain in the 2.5–3.0% range in 2016, fairly decent for a developed country.

2) China’s economic activity will decelerate even more.•  The past year was no exception, with 2015

growth expected to be 6.8%, compared with 7.3% in 2014 and 7.7% in 2013. IHS predicts that China’s growth rate will decline even further to 6.3% in 2016.

• Continuing problems (overcapacity, high debt levels, and low or negative rates of return) in the heavy manufacturing, utilities, and mining sectors have been—and will continue to be—the principal drags on the economy

• Change in the government’s one-child policy nor the Chinese renminbi’s inclusion in the IMF’s special drawing rights basket is likely to have a big impact in the near term.

3) Emerging markets remain in recession, other’s growth will be a disappointment.

• The recessions in Brazil and Russia are expected to last into 2016.

• Those hit hardest are commodity exporters but countries like Saudi Arabia, Kuwait, and the United Arab Emirates stay strong due to strong reserves and better finances. 

• Growth in most emerging markets will remain challenged by weak global growth, fragile exchange rates, and low commodity prices. 

• The prices of both oil and other commodities are expected to rise gradually over next year.

4) Global economy not likely to derail• Net effect of the commodity rout on

global growth is positive.• Asset bubbles and the potential for them

bursting are not a significant hazard.• Risk of even slower growth in China is

high, the impacts on the developed world and commodity-importing emerging markets is limited

• Big oil shock, triggered by an escalation of the Middle East conflicts could derail economy.