The Organisation for Economic Cooperation and Development has forecast the global economy will grow by 3.1% in 2015. As early as October last year, they had projected growth of 3.7% for this year.
The OECD describes the situation as ‘moderately good’. A 0.6% drop in expectations doesn’t strike me as moderately good. It’s even worse considering that the global economy grew by 3.3% in 2014.
The big worry is that growth forecasts are down despite accommodating economic conditions. Energy prices and borrowing costs have never been lower worldwide. But low interest rates and falling oil prices have failed to lift consumer and business spending. Instead, we’re seeing depressed growth rates while it has never been easier to borrow and spend.
The problem globally, like in Australia, is that growth is down on average from recent decades. Between 2001 and 2011, the global economy grew by 3.9% on average.
But this was during the period when both developed and emerging economies were expanding. Double digit growth rates in China were the norm. Brazil, India and Russia were also growing rapidly. The world economy could always rely on emerging nations to lift global growth.
But since 2008, all of these economies have started to slump Now the world has fewer champions to take up the slack. The lack of emerging economies is contributing to weak global labour markets.
In response to this lacklustre growth, business spending has nosedived. Businesses look at an environment in which consumer demand is flat. Falling consumer spending is keeping unemployment stubbornly high and wage growth stagnant. As a result, companies are investing less on everything, from equipment to people.
In light of all this, the OECD still believe that the world economy will grow by 3.8% in 2016. Let’s not forget the OECD was predicting 3.7% global growth for 2015 in October last year. That makes their projections less credible.
Will the global economy rebound in 2016?
The OECD is bullish on the global economy looking ahead to 2016. They believe that global fixed investment will increase total outputs by 4% next year. That would make global investment levels the highest they’ve been since 2008. But there are issues which could weigh down heavily on the global economy.
The prospects for growth in the Eurozone remain uncertain. The OECD says that the economic bloc is set to grow by 2.1% in 2016. But high youth unemployment will continue to weight on economic growth potential. And Europe will need to achieve this with already rock bottom interest rates. The ECB can’t push them any lower.
That means they’ll be dependent on exports at a time when global demand is slumping. It may prove harder to achieve than the OECD believe.
The second problem revolves around China. Even the OECD expects it will miss its 7% growth rate. They see China growing by 6.7% in 2016. That’s still high, but it has a domino effect on other economies — like Australia. If China keeps tumbling, it would result in falling Aussie commodity exports.
On top of that, the 7% figure is symbolic for a few reasons. Not least because that’s the point at which China believes unemployment is kept in check.
But perhaps the most significant factor could result from rising US interest rates.
How interest rates in the US could hurt global growth
Rising US interest rates would have the effect of pushing the US dollar up. The OECD expects that the US Fed could raise interest rates by 2% before the end of 2016. Rising rates would hurt US consumer spending heavily. Lending would plummet, which would affect household spending habits.
But an interest rate rise would also have the effect of pushing down global currencies.
It’s certainly a scenario that Australia has been pining for. The Daily Reckoning’s Greg Canavan explains:
‘The Australian economy needs to adjust to the post mining boom environment. It can do that via a lower dollar. Though this is a general devaluation and loss of relative wealth for the whole economy.
This is what the RBA wants to achieve. A lower dollar across the board is a loss of relative wealth. But it’s also a necessary step to restore international competitiveness.
On an international basis, we’re expensive and uncompetitive. Australia needs a lower dollar to help restore some of that competitiveness. It’s just a shame that the RBA bungled its attempt to push the dollar down.’
But rising interest rates may not have the desired effect for Australia’s exporting sector. Let me explain.
The importance of the US economy to the globe can’t be understated. US spending makes up almost a third of global consumption. Any change to that would hurt exporters worldwide — especially China.
But if US demand slumps on the back of higher rates, China’s growth is likely to slow further. That in turn would hurt Australia’s exporting sector significantly. And it would make it much more difficult to maintain positive growth rates.
That could make it more difficult to achieve the OECD’s targeted 3.8% growth rate in 2016. And it could make it that much harder for Australia to maintain any semblance of decent growth.
Contributor, The Daily Reckoning
PS: Greg believes that the days of economic growth in Australia are numbered. In fact, he thinks that we’re set for a period of sustained economic decline. As one of Australia’s leading investment analysts, Greg is convinced that Australia faces a recession in 2015.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our economy is in the hole it is. He’ll show you why debt levels are so out of control — and why that means a recession is inevitable. And he’ll prove to you why the RBA realise the recession is coming. Download your copy today and Greg will show you what you can do to protect your wealth from the fallout of the recession. To find out how to download his free report right now, click here.