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Global Economic Pickup Will Balance on Dollar
World Economy

Global Economic Pickup Will Balance on Dollar

The world economy may be set for another year like 2015, with modest growth in developed economies offsetting persistent weakness elsewhere but generating very little inflation and keeping interest rates low.
The US Federal Reserve’s long-awaited rise in rates from zero showed confidence in the world’s largest economy, but rival China is still struggling for a foothold with rate cuts, Reuters reported.
Although some countries, such as Brazil, have mainly home-grown inflation troubles, the Fed’s first post-crisis rate hike is an unlikely cure for what ails the rest of the world.
With exchange rates dominating the policy debate in many countries, what happens to the dollar will matter a lot.
“The key question is whether the US economy is finally robust enough not only to sustain its own recovery but also to lift world trade and global growth enough to allow the external deflationary pressures weighing on US inflation to wane,” outlined HSBC economists Janet Henry and James Pomeroy.
Along with an abrupt downturn in the volume of global trade and a continuing fall in commodity prices, the dollar’s rise this year has brought US industrial growth to a near-standstill, keeping a lid on inflation pressures from abroad.

 The Dollar Fiasco
The other extreme, according to HSBC, is that the United States, “via a strong dollar, will simply become the latest victim of the deflationary pass-the-parcel which has plagued the global economy for a decade, and find itself following all of the other developed market central banks which raised rates but soon found they had to reverse course.”
“The outcome, we believe, is likely to be somewhere in between.”
A Reuters poll of 120 economists on Friday forecast the Fed would hike rates again in March, but probably won’t move as quickly next year as policymakers have suggested.
The polls point to global growth averaging only 3.4% next year, with scant prospect of touching 4%, given the slowdown in China and the gloom surrounding emerging markets.
Nor is it easy to find analysts expecting broad weakness in the dollar, with the most aggressive views suggesting the euro could even fall below parity.
 Some Hope Emerging
The US growth and inflation outlook is bleaker than forecast this time last year, even after a sharp fall in unemployment. Wage inflation has picked up, but by less than many had thought it would.
Wall Street stock indexes are trading near their levels of a year ago, confounding predictions of a solid rise in 2015, with strategists still expecting them to climb despite downward pressure on earnings.
Over the past year, global fund managers have cut their recommendations for equity holdings to near their lowest since the financial crisis, even as they ramped up bond holdings.
Since crude oil prices began falling sharply 18 months ago from above $100 a barrel to below $40 now, the number of analysts predicting a rebound has dwindled. Some are now saying $20 is more likely than a sizeable move higher.
 Better Performance
But there are some bright spots. Underpinned by the European Central Bank’s €60 billion a month of bond purchases, the eurozone is finally generating modest growth and unemployment has begun to fall.
Inflation remains well below target, however, and so ECB stimulus, including the negative deposit rate, will remain in place for all of next year. That puts the world’s largest trading bloc–and most other central banks–on an opposite policy path to the Fed.
Some emerging market economies are performing better, too. India is forecast to grow at a decent clip, underpinned by rate cuts earlier this year during a window of low inflation. And optimism about Mexico has grown as it slowly starts to take advantage of a recent historic reform in the energy sector.
But much can still go wrong. Food prices have already pushed Brazil’s inflation above 10% during a deep recession and could rise further.

 

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