Financial Market Snapshot September 2016

Global Scenario September 2016

INDUSTRIALIZED COUNTRIES

Economic growth remains fragile

Neither the United States nor Japan nor Europe show robust growth. Expectations of a rate hike by the American central bank have receded. The expectation that there will not be an imminent rise in interest rates has given a boost to the stock market, driven bond prices higher and slightly weakened the US-dollar. 

U.S. -employment in ambivalent situation

While the unemployment rate has fallen in the United States, there has also been a deterioration of the overall employment situation as it is shown by the fall in the labor participation rate. This fact reveals that a significant part of the labor force has given up looking for work and is no longer part of the active labor force. This rings the alarm bells for the future in the case that the economy should finally strengthen at some point. Rising wage rates would be the consequence along with a rising price level to follow - leading to the scenario that scope for a strong and broadly based recovery of the US economy will be limited.

Deflation fears plague central banks

Over the past eight years, since the onset of the financial crisis, the major central banks have tried to prevent deflation in a desperate attempt to reflate the economy. Despite a massive policy of quantitative easing, which drove base money to extreme heights, neither inflation nor a vigorous economic rebound has been achieved. It is more an act of despair than a well thought-out strategy when central banks fabricate negative interest rates. While the effect is largely nil for output, financial assets experience a boom that will inevitably end in a bust when monetary policy will change.   

Europe feels the Brexit blues

The shock of the British Brexit vote has given place to a widespread feeling of low mood – not only in Britain but also in the whole European Union (EU). There are fears that other countries may follow the British example and leave the EU. Yet the British move has also shown that leaving the Union is not easy. In fact, the British government has not yet made the decisive move to trigger “article 50”, which would mark the start of the process of separation. Uncertainty about the future of the Union paralyzes the decision-making bodies of the EU at a time when decisive action would be required – from the refugee crisis to the ongoing economic problems of Europe’s Southern periphery.

EMERGING MARKETS

G20 meets in China

The “Group of Twenty” (G20) which is composed of the 19 major economies of the world with an extra seat for the European Union that is represented by the European Commission and the European Central Bank, holds its annual meeting this year on September 4 and 5 in China. The group, which represents roughly 85 % of the world economy, will meet under the theme: “Towards an innovative, invigorated, interconnected and inclusive world economy”. Additional areas of discussion that require a global response include climate change, migration, and the refugee crisis.

Brazil concludes impeachment and removes President Dilma Rousseff from office

The long-lasting uncertainty about the Brazilian government has ended with the definitive end of the presidency of Dilma Rousseff and the take-over of the presidency by Michel Temer who is said to hold the office until the next presidential election in 2018. It remains to be seen whether the government will succeed to re-establish confidence and move the country out of its deep recession.

The economic crisis in Venezuela deepens

Without a regime change, there cannot come an improvement of the Venezuelan economy. The inflation rate has hit more than 180 %, the annual growth rate stands at a negative 7.1 % and the currency is in a free fall. At any moment, the ongoing political unrest could lead to a confrontation at the scale of a civil war with consequent effects for the whole of the South American subcontinent.

China on the rise, despite temporary slowdown to the Chinese economy

The slowdown of the rate of growth of the Chinese economy from over ten percent in 2010 and 2011 to the current rate of 6.7 % is a move to a more sustainable level. Inflation is under control, the unemployment rate low and the currency relatively stable.

The Middle East and North Africa hit by unrest and war

The Middle East and North Africa are stuck in the turmoil of war, social unrest, and terrorism. After the failed military coup in July of 2016, Turkey’s incumbent president Erdogan could fortify his power by establishing an authoritarian regime. While Turkey’s role as a regional player will increase, the economy will suffer.

THE CONTINENTAL ECONOMICS INSTITUTE
Antony P. Mueller, September 6, 2016