“Yesterday, upon the stair/I met a man who wasn’t there/He wasn’t there again today/I wish, I wish he’d go away”
The opening lines from Hughes Mearns’ famous poem aptly describe renewed fears of a global recession in 2016, with the ghostly apparition of a downturn yet to fully disappear. Yet after disappointing Chinese economic data, falling oil prices and another downgrade to the world economy’s prospects, this time by the International Monetary Fund, world financial markets have not had to look too far for sources of trouble.
U.S. billionaire investor George Soros has added fuel to the fire, telling Bloomberg that Asia’s biggest economy is headed for a crash rather than the smooth slowdown planned by Beijing.
“A hard landing is practically unavoidable,” he said Thursday at the World Economic Forum. “I’m not expecting it, I’m observing it.”
Soros has warned that a crisis similar to 2008 faces global financial markets due to China’s “major adjustment problem.” According to the Hungarian-born Soros, China’s debt burden and capital flight “are both signals of a hard landing,” with a more accurate measure of China’s GDP growth being around 3.5 percent compared to the official 6.8 percent expansion reported for the fourth quarter.
For the calendar year, China’s GDP expanded by 6.9 percent, below Beijing’s 7 percent target and missing the official estimate for the second straight year. According to ANZ Research, China’s economy could slow further to a 6.4 per cent expansion this year and as low as 6 per cent in 2017.
Bloomberg Intelligence estimates China had about $843 billion of capital outflows in the 11 months through November, while foreign currency reserves fell in December to their lowest level in three years amid fears of another currency devaluation. According to the Australian Financial Review, Chinese banks are now blocking some foreign exchange transactions in an attempt to prevent more capital flight, hurting the prospects of greater Chinese investment in countries such as Australia.
According to Soros, China’s slowdown together with cheaper oil and competitive currency devaluations is spreading deflation worldwide. ANZ Research declared in December that China had entered into a deflationary era with factory-gate prices dropping for a record 46 straight months, while official readings of the manufacturing sector have shown a decline for five consecutive months.
On Thursday, the MSCI All-Country World Index of stockmarkets was on the cusp of a bear market, having dropped by more than 19 percent since its previous high in May 2015. After the worst start to a trading year on record, around 40 stockmarkets around the world with a combined value of $27 trillion have entered bear territory, including China, Hong Kong, Japan, Singapore and Taiwan.
In its latest “World Economic Outlook” report, the IMF joined its Washington-based counterpart, the World Bank in downgrading its forecasts for global growth in 2016. The Fund now expects the world economy to post a 3.4 percent GDP rise this year and 3.6 percent in 2017, both projections down 0.2 percentage point on its October forecasts.
According to the IMF, advanced Western economies can expect some improvement in 2016. Japan, the world’s third-largest economy, should post a modest pickup from last year’s slim 0.6 percent GDP gain to 1 percent this year, before slowing to just 0.3 percent in 2017 on the back of a planned hike in the consumption tax.
Japan’s economy is expected to improve “on the back of fiscal support, lower oil prices, accommodative financial conditions, and rising incomes,” the IMF said. According to the Nikkei, the Bank of Japan is also considering further monetary expansion measures in the face of a strengthening yen and sliding oil and stock prices, helping to keep its inflation target on track.
However, the news from the IMF was worse for emerging market and developing economies, including in Asia, which declined for the fifth straight year in 2015. Emerging and developing Asia is seen slowing from 6.6 percent GDP growth last year to 6.3 percent this year and 6.2 percent in 2017, hit by lower commodity prices, the rising U.S. dollar and the effects of China’s slowdown.
China is expected to slow from 6.9 percent GDP growth in 2015 to just 6.3 percent this year and 6 percent in 2017, hit by a “faster-than-expected slowdown in exports and imports, in part reflecting weaker investment and manufacturing activity.”
Growth prospects for the “ASEAN-5” nations of Indonesia, Malaysia, the Philippines, Thailand and Vietnam were also downgraded slightly, although the five are still expected to post a slight pickup from 4.7 percent growth in 2015 to 4.8 percent this year and 5.1 percent in 2017.
However, India escaped the IMF’s bearishness, with its growth forecasts left unchanged at 7.5 percent this year and next, representing the fastest growing major economy.
Nevertheless, the Fund warned that “risks remain tilted to the downside,” including a sharper-than-expected slowdown in China, a further appreciation of the U.S. dollar and a sudden bout of global risk aversion, along with an escalation of geopolitical tensions, including in Asia.
“All in all, there is a lot of uncertainty out there, and I think that contributes to the volatility,” the IMF’s Maurice Obstfeld said. “We may be in for a bumpy ride this year, especially in the emerging and developing world.”
For nervous financial markets seeing risks everywhere, the proverbial “man on the stairs” threatening another global financial crisis cannot disappear fast enough.