Danger signs flashing for global economy, years after crisis

WASHINGTON -- Eight years after the financial crisis, the world is coming to grips with an unpleasant realization: serious weaknesses still plague the global economy, and emergency help may not be on the way.

See Full Article

Sinking stock prices, flat inflation, and the bizarre phenomenon of negative interest rates have coupled with a downturn in emerging markets to raise worries that the economy is being stalked by threats that central banks -- the saviours during the crisis -- may struggle to cope with.

Meanwhile, commercial banks are again a source of concern, especially in Europe. Banks were the epicenter of the 2007-9 crisis, which started over excessive loans to homeowners with shaky credit in the United States and then swept the globe into recession.

"You have pretty sluggish growth globally. You don't really have any inflation. And you have a lot of uncertainty," says David Lebovitz, who advises on market strategies for JP Morgan Funds.

Some of the recent tumult may be an overreaction by jittery investors. And the rock-bottom interest rates are partly a result of easy money policies by central banks doing their best to stimulate growth in the years since the crisis.

Unemployment is low in several major economies, 4.9 per cent in the United States and 4.5 per cent in Germany. The IMF forecasts growth picking up from 3.1 per cent last year to 3.4 per cent this year.

But that's still far short of the 5.1 per cent growth in 2007, before the crisis. The realization is dawning that growth may continue to underperform, and that recent turmoil may be more than just normal market volatility.

In Japan, the yield on 10-year bonds briefly turned negative, meaning bondholders were willing to pay the government for the privilege of being its creditor -- for years. In the United States, long-term market rates are sliding again, even though the Federal Reserve has begun pushing them higher. Many government bonds issued by European countries trade at yields that are negative or close to zero.

That's alarming because such low and even negative rates are way out the ordinary. For one thing, they suggest bond investors don't expect enough economic growth for central banks to raise rates.

Along with that have come sharp drops in global stocks. The Standard and Poor's 500 index is off 10.5 per cent for the year; Japan's Nikkei 225 is down 16 per cent; the Shanghai composite index 22 per cent; Germany's DAX over 14 per cent.

Here are some of the risks that markets have been waking up to.

CHINA

A sharp slowdown in China threatens to remove a pillar of global growth. Slackening demand for raw materials there is hitting producers of oil and metals in other countries. Energy exporter Russia, for instance, slid into recession and its currency has plunged.

German automaker Daimler made a record operating profit of 13.8 billion euros last year, helped by a 41 per cent surged in sales in China for its Mercedes-Benz luxury cars. But its shares fell when it announced a cautious outlook for only a slight profit increase for 2016 and "more moderate" growth in China. CEO Dieter Zetsche cautioned that he saw "more risks than opportunities" amid "restrained" global growth.

EMERGING MARKETS, SUBMERGING

Money is flowing out of so-called emerging markets like Brazil, Russia, South Africa and Turkey. Investors pulled $735 billion out such countries in 2015 -- the first year of net outflows since 1988, according to the Institute of International Finance.

And emerging markets aren't so emerging any more: they provide 70 per cent of expected global growth.

Central banks led by the U.S. Fed responded to the global recession by slashing interest rates and printing money. That encouraged investors in search of higher returns to place their money in emerging markets.

Now the Fed is trying to push up its interest rates, and those flows have gone into reverse, causing financial markets and currencies in emerging markets to sag. Debt becomes harder to repay.

IMF chief Christine Lagarde has warned of "spillback" effects from emerging markets on more advanced economies.

Stephen Lewis, chief economist at ADM Investor Services International, says there's little the Fed can do but go ahead with raising rates to a more normal level.

"Unless we're going to paralyze monetary policy in the advanced economies forevermore, it is inevitable that the funds that have gone into emerging markets are going to come back out of them," he said.

UNCLE SAM

The other pillar of the global economy besides China, the U.S., is also now showing signs of weakness. Maybe not a recession, yet. But growth was a weak 0.7 annually during the fourth quarter. Factory output has declined.

Though unemployment has dropped, wages have not recovered quickly and companies appear to be unsettled by the global jitters.

A rising dollar -- a side effect of expected Fed interest rate increases -- could hurt exporters. That's one reason the Fed may in fact hold off raising rates again soon.

BANKS

Banks stocks have been plunging in the U.S. and Europe.

In the U.S., low oil prices may mean companies involved in expensive oil and gas extraction will be unable to repay loans made to dig wells that are no longer profitable.

In Europe, bank shares have been shaken by the bailout of four Italian lenders and fears about 1.2 trillion euros ($1.35 trillion) in bad loans across the 19 country currency union.

John Cryan, co-CEO of Deutsche Bank, had to take the unusual step of publicly reassuring that the bank's finances were "rock-solid" after investors pounded the bank's stock.

The spread of negative interest rates could reduce banks' profitability, since it squeezes the different between the rates at which banks borrow and at which they lend.

Sick banks can choke off credit to companies and dump huge costs on governments, shareholders and creditors.

OUT OF BULLETS?

With interest rates below zero in some cases, it's much harder for central banks to apply more stimulus if needed.

Low rates and stimulus in the form of bond purchases -- using some $3.6 trillion in newly printed money in the case of the Fed -- have driven up stocks worldwide.

Yet inflation has remained quiescent. U.S. consumer prices fell 0.1 per cent in December. European inflation is only 0.4 per cent annually, despite massive ECB stimulus.

So markets may be realizing this is one downturn where the central banks can't ride to the rescue as before.



Advertisements

Latest Economic News

  • Artificial intelligence will tell you what you want, and you will listen: Don Pittis

    Economic CBC News
    It may seem crazy, but the world's biggest retailer is working on a scheme to use artificial intelligence to decide what you will want to buy before you've decided to buy it and send it to your home. AI, after years lurking in the background, is about to get significantly more intrusive. Source
  • Hydro One's planned merger with U.S. energy firm Avista passes another hurdle

    Economic CTV News
    TORONTO - Hydro One Ltd. and Avista Corp. say their proposed merger has cleared another hurdle in the U.S. The two companies say the Committee on Foreign Investment in the United States has completed a review of the deal and found no unresolved national security concerns. Source
  • Asian markets drop despite Wall Street gains

    Economic CTV News
    BEIJING - Asian markets were mostly lower Tuesday after Wall Street gained as Italy moved toward forming a euroskeptic-led government. KEEPING SCORE: The Shanghai Composite Index declined 0.2 per cent to 3,208.20 and Sydney's S&P-ASX 200 lost 0.7 per cent to 6,039.20. Source
  • Anxiety lands as WestJet pilot strike looms

    Economic CBC News
    Dana Sorensen booked a WestJet flight from her home in Vancouver to Calgary, where she's racing in the upcoming ultra-marathon. But the anxiety of a looming pilots' strike was too much to bear. She paid for another flight on a different airline, a peace of mind that cost her an extra $500. Source
  • Banks poised to report strong Q2 despite housing slowdown: analysts

    Economic CTV News
    TORONTO -- Canada's biggest banks are upping the ante in the mortgage wars amid slowing growth and national housing sales at lows not seen in several years, but analysts say real estate market woes won't dent lenders' earnings, just yet. Source
  • Insider Q&A: Should investors worry about 'peak earnings?'

    Economic CTV News
    NEW YORK -- Speaking about a peak suddenly made stocks weak. Investors got a rude awakening in April when executives at Caterpillar said the construction and mining equipment company didn't expect to top its first-quarter profit for the rest of the year. Source
  • From airlines to pizza parlours, EU businesses adopt data law

    Economic CTV News
    LONDON -- Lisa Meyer's hair salon is a cozy place where her mother serves homemade macaroons, children climb on chairs and customers chat above the whirr of hairdryers. Most of the time Meyer is focused on hairstyles, colour trends and keeping up with appointments. Source
  • China says it can't guarantee no more trade tension with U.S.

    Economic CTV News
    BEIJING -- China's government said Monday it cannot guarantee that renewed trade tension with Washington can be avoided after U.S. Treasury Secretary Steven Mnuchin declared a temporary truce in a spiraling dispute that prompted worries of a chilling of global commerce. Source
  • Trump pulls back from brink of trade war with China

    Economic CTV News
    WASHINGTON -- U.S. President Donald Trump on Monday hailed his administration's temporary truce with China on trade, even as his Treasury secretary and China struck a note of caution on the latest agreement. After high-level talks in Washington last week, Beijing has agreed to "substantially reduce" America's trade deficit with China. Source
  • Oregon's flooded recreational pot market a cautionary tale: economists

    Economic CBC News
    As marijuana farmers in Oregon say a flood of supply is killing their businesses less than three years after recreational cannabis was legalized, economists say it's a warning to Canada. Stephen Easton, professor of economics at Simon Fraser University and senior fellow at the Fraser Institute, says large fluctuations in price and supply are bound to happen when you create a legal market where an illegal market already exists. Source