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Uncertainty Grips Global Growth
World Economy

Uncertainty Grips Global Growth

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.
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 saviors during the crisis—may struggle to cope with, AP reported.
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.

Jittery Investors
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% in the United States and 4.5% in Germany. The IMF forecasts growth picking up from 3.1% last year to 3.4% this year.
But that's still far short of the 5.1% 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% for the year; Japan's Nikkei 225 is down 16%; the Shanghai composite index 22%; Germany's DAX over 14%.

Risks Remain
Here are some of the risks that markets have been waking up to.
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 ($15.44 billion) last year, helped by a 41% surge 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% of expected global growth.
Central banks led by the US 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.

Shares Shaken
Banks stocks have been plunging in the US and Europe. In the US, 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 ($1.35 trillion) in bad loans across the 19-country currency union.
The spread of negative interest rates could reduce banks' profitability, since it squeezes the difference 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.

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