WASHINGTON, May 26, 2016 — The World Bank’s 2016 global economic growth predictions estimate a slower rate of increase than what was previously forecast. The bank currently estimates 2016 global growth at approximately 2.9 percent. Combinations of less than anticipated growth in two of the world’s largest economies, China and the U.S., curbed these global growth predictions.
Positive trends in both economies are seen to be present, although such trends may not be enough to trigger consumer sentiment and the confidence associated with widespread economic growth. Lower unemployment and income parity in the U.S. and China, respectively, are leading considerations in estimating baseline trends for future growth.
With regard to emerging markets, South America, sub-Saharan Africa and parts of Asia produce smaller economic impacts on the global economy than do the major national economies. When compared to global gross domestic product (GDP), shifts in overall growth in these regions is negligible.
Turmoil from the European Union’s economic recovery strategy lingers in bond markets as underpricing debt, given that currently added liquidity remains trapped in the market through the eurozone’s quantitative easing programs.
China’s current growth slowed to 7.3 percent, down from the 10.6 percent recorded prior to 2007, a period that saw U.S. growth of 2.5 percent. China’s monetary policy targets a tight control over its domestic money supply. China cut its reserve ratio five times in the most recent fiscal year. Down to 17 percent, the discount rate now stands at 1.5 percent, its lowest since 2008.
Most other central banks are below 1 percent, arguably a unit or more away from traditional risk-averse standards. At 1.5 percent, the Chinese still remain above most of Europe in terms of their easy money policy, which presumably keeps them well outside of a possible liquidity trap. Unknown, however, is whether this will affect future growth.
In U.S. dollars, the yuan has appreciated at or about $33 over the three years that ended in March. Despite its foreign reserve climbing steadily to rest at $431.60 as of March 2016, China’s total loan growth has risen 37 percent since 2006.
Exit of Demand
What drives demand? Income and expectations. Average Chinese income is significantly less than 20 percent of the U.S. average despite the dramatic rise in that number of people in the same income bracket over the past two decades. Yet Chinese average income quadrupled from 2004 to 2015 to an average of $7,000 U.S. and is expected to climb even higher in the coming decade. What decreases demand? Lower income and negative expectations. Speculators attribute the current slowdown in China’s economy to decreased policy manipulation, a shrinking technology gap and changes in capital and labor productivity.
Use of cash: Infrastructure projects domestic, global, space.
Reported local government spending in China is restrained. However, globally, government military expenditures place China second only to the United States in that category with total 2015 military expenditures up 11 percent in 2015 as compared to the previous year. Overall military growth predictions for China should keep in mind that the country’s military spending numbers are known to be deflated. On other fronts, China’s government plans to have a manned space station operational by 2020. According to the Council on Foreign Relations, in 2012, China supplied the U.S. with $165 billion (U.S.) in foreign direct investment (FDI).
As predicted by economists, Japan’s decision to increase its sales tax produced negative impacts on GDP growth in 2014. July 2014 saw a -0.2 percent decrease in growth as a result of the tax increase imposed in April that year. Further tax increases scheduled for 2016, ranging from 8 to 10 percent, were postponed until 2017 for fear of eroding economic conditions. The deep plunge in demand and economic growth was minus 1 percent in 2014, though it neared a positive 1 percent in 2015. The World Bank currently estimates 2016 growth at 1.3 percent.
Sustained by external demand, Japan’s anemic GDP growth exhibited a notable decrease in imports as Japanese exports fell by 0.9 percent. Non-residential investment and government spending led growth on the plus side. Overall, however, Trading Economics.com estimates that Japan’s economy contracted as much as 1.1 percent in FY 2015.
Federal Reserve Rate Hike
The U.S. Federal Reserve’s decision on whether to raise interest rates currently consumes the attention of most economists. As the largest global economy, changes in U.S. monetary policy are watched closely, factoring into various predictions for global growth and worldwide consumer demand.
U.S. Industrial Production (IP) has decreased in all sectors—most notably mining—since March 2015. IP is one of two reports closely monitored by the Federal Reserve because it gauges the relative strength and flexibility of the manufacturing sector. As a leading indicator of business investment spending, it also helps determine estimates of ongoing and future economic vitality.
According to official estimates, U.S. unemployment is currently hovering around 5 percent, as of March 2016, its lowest point since President George W. Bush’s second term, with approximately 8 million unemployed. Hardest hit by the recent recession were African-Americans, who are currently experiencing an elevated rate of unemployment, currently estimated at roughly 9.0 percent. Unofficial Department of Labor estimates of U-6 unemployment among all economic strata puts the number of unemployed, underemployed and uncounted workers at just under 10 percent.
With decreased IP and anemic GDP growth at less than 2.4 percent, however, the U.S. economy may very well be contracting. The upside is that there is no inflation.
According to government estimates and projections, the overall economic trend in the U.S. is seen as incrementally positive and stable, although still not as strong or robust as it was before the Great Recession. Economic predictions in an election remain tentative, at least in part because the November elections carry potentially far-reaching implications regarding future economic and consumer expectations.
Until this month at least, any interest rate increase by the Federal Reserve was judged unlikely to occur until after Q4 2016, giving the Fed time to consider holiday shopping trends and fiscal policy shifts from state and federal budgets. Speculation has recently shifted raising expectations of a Q2 or Q3 interest rate increase. Such expectations will likely lead to a continuing rise in bond prices and a decrease in yields.