Declining Expectations

The large increase in share sell-offs coupled with a troubled Chinese market have led to a global market downturn in recent months. Although most analysts had projected the markets to recover by the beginning of 2016, we instead saw a number of stock markets slip into correction territory. As a result, the global economy as a whole was negatively impacted, and recovery was forecasted to be gradual at best, causing the IMF to once again lower world economic output expectations.

The world as a whole is plagued by weak and uneven growth according to Maurice Obstfeld, IMF economic counselor and director of research. In the latter part of January this year, the IMF announced that global growth projections were now 0.2% lower than previously forecasted in October of 2015 (from 3.6% to 3.4%). Although the decrease itself may seem low, when taking into account the world economy as a whole, even a 0.2% decrease can have drastic consequences, especially within poorer nations. The IMF cited challenges that the emerging markets would be facing during this world economic downturn as a primary factor behind its decision.

The IMF also hinted that geopolitical tensions in the EU have been a contributing factor behind this decision. Although not officially admitted, it is also predicted by trusted economists that India and China may be over-emphasizing their GDP growth rates, especially given the fact that China in particular should have greatly underperformed this past year. If two of the largest markets in the world today are altering data in order to attract more investors, it comes as no surprise that the IMF may think it wise to lower expectations.

Risk aversion on the part of investors also played a critical role behind the poor expectations. Many investors are either selling off shares or waiting for share prices to recover before attempting to enter the market again. This is especially harmful to the US economy in which the strong dollar has caused international investors to become reluctant to enter the US market. In addition, a number of countries will now have trouble paying off debt to the US due to the strong US currency.

A decline in oil prices has also impacted much of the Middle east, along with Nigeria and Russia. Decreasing commodity prices have exacerbated matters further, causing much of the production-oriented developing countries to have slower than expected growth rates. As a result, a number of economies are also now forecasted to shrink. For instance, Brazil is now projected to experience a 3.5% decline. If developing nations and larger economies such as Brazil continue to underperform in the global market, it may be a while before we actually experience substantial growth.

Perhaps waiting for the market to correct itself is no longer a viable option, and government officials must take drastic measures in order to rectify the situation. The Bank of Japan, for example, instated negative interest rates earlier this year, which actually led to a boost in market activity in a number of different nations. Markets often play out in unpredictable ways; however, in order to avoid a continued downward spiral, measures on the part of governing institutions are necessary now more than ever.

5 thoughts on “Declining Expectations”

  1. The strong dollar along with a rate increase, in addition to downturns in other economies, has left the US in an interesting predicament. I’m curious to see how this will play out in the coming year.

  2. Interesting read. I wonder if the UK’s Brexit campaign, coupled with similar campaigns by other right-wing euro-skeptic parties, have played into these geopolitical tensions in the EU (along with reduced growth forecasts via the IMF).

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