The global economy’s growth will be weaker in 2016 with only a +2.5% rise in GDP (2015: 2.6%), according to Euler Hermes. In its updated risk analysis for Q1 2016, the company notes that subpar global growth, still below +3% for the 6th consecutive year, will affect a majority of countries – both advanced economies and emerging markets.
“More than 70% of the world’s economy will slow or be in recession in 2016,” said Ludovic Subran, chief economist at Euler Hermes. “China, Saudi Arabia, Turkey, the U.S. and the UK will register lackluster growth. Argentina, Brazil and Russia will remain in negative territory.”
Euler Hermes dubs the main culprits as ‘The Five FLOPS of the Global Economy’:
1. Trade flows are anemic. Global trade is set to contract again in 2016, with a 2% decrease in value after a fall of -10% in 2015. The number and record-value of cross border mergers and acquisitions year to date suggest investment flows may be picking up modestly. Yet capital flows remain wobbly.
“Today the issue the world economy faces is the rise and fall of capital flows, which wreaks havoc on currencies and emerging market companies,” said Subran.
2. Liquidity, already abundant, should grow by +6% this year, while monetary policies are less divergent then before. Impact on the real economy remains limited, creating a major issue for sectors impacted by high debt levels and anemic turnover, such as commodities and machinery.
“These liquidity pockets remain local, in Europe for instance, in contrast with emerging markets where liquidity is scarce, particularly related to extending credit to companies,” noted Subran.
As a result, 2016 will see the return of non-payment risk. After six consecutive years of decline, global corporate insolvencies should increase by +2%, mainly due to emerging country turmoil.
3. Oil is either too costly, or too cheap. With oil prices set to remain low for longer, negative effects are appearing. Countries with revenues heavily reliant on oil exports are also often those that spent lavishly when barrel prices were at record levels.
The list includes Arab states of the Persian Gulf and Saudi Arabia, as well as Angola, Azerbaijan, Equatorial Guinea, Gabon and Venezuela. Social tensions could escalate if these governments push forward further subsidy cuts or tax hikes in order to compensate for the loss in revenues.
4. Public policies are too hesitant and lack coordination – preventing a much-needed strong stimulus to investment. While rigorous fiscal consolidation and debt elimination haunt European economies less than previously, the pace is not fast enough to spur growth.
In parallel, emerging markets are feeling the impact of austerity measures aimed at decreasing public deficits. Even if in some countries such as China, Turkey or India, sustained high public expenditure contributes to growth and rising debt, the private sector is spared from reducing its debt burden.
5. Surprises have become more frequent over the last few years. Euler Hermes identified several possible and potentially disruptive shocks.
- Capital controls have already been introduced in many countries to curb currency volatility and capital flight. Governments have therefore created downward pressure on trade, payments and dividend repatriation. Egypt is a relevant recent example.
- Secondly, the political calendar is crowded with sensitive elections and referendums, including the U.S. and the UK. Commenting on the risk posed by Brexit, Ana Boata, Europe economist at Euler Hermes noted: “We believe a Brexit could be costly for the UK.
Export losses of up to 30 billion pounds and almost 200 billion in investments are at stake. In Europe, Ireland will be the country most impacted. Germany and the Netherlands could also suffer significantly because of their high exports to the UK.”
- Finally, the risk of an escalating conflict in the Middle-East remains high. A flare-up could create regional repercussions, and hurt investor appetite.
The global economic deterioration, coupled with increased geopolitical tensions, generated changes in Euler Hermes’ Country Risk Ratings at the end of Q1 2016, with a focus on emerging markets.
The company’s Economic Research department announced six downgrades - Brazil, Hong Kong, Macao, Singapore, South Africa and Taiwan - and four upgrades: Argentina, Croatia, the Dominican Republic and Greece.
Exposure to Chinese risk, reliance on commodities and current account weakness are common denominators of country risk in 2016 – and influenced all six downgrades.
Asian hubs: when a giant sneezes, the neighborhood gets a cold
Heightened short-term risk in Hong Kong, Macao, Singapore and Taiwan translated into downgraded risk ratings. The Asian hubs will be affected in 2016 by lower global trade overall and, more importantly, by China’s refocus from manufacturing to services and the related slowdown. Subran observed that “a loss of export opportunities should result in an economic slowdown for these countries: Hong-Kong and Singapore should grow modestly (+2%), and Taiwan by only +0.7%.”