Is the World Economy Anywhere Near a Meaningful Recovery?

8 September 2015

Is the world economy stuck in first gear?

In the most recent assessment of the prospects for the world economy Moody’s predicts the world is on course for muted growth for the remainder of 2015 and 2016.

Looking purely at the numbers, Moody’s forecasts that GDP growth for the G20 block will slow to around 2.7% in 2015 (less than the 2.9% achieved in 2014), and will only moderately increase to 3% in 2016.

Effectively it appears that the world economy cannot get out of first gear.

What should we expect in terms of oil prices?

On the back of recent events Moody’s has revised downwards its estimation of oil prices following sharp falls in recent months and continued evidence that supply continues to outpace demand.

oil price fall







Accordingly Moody’s expects Brent crude to average $57 a barrel in 2016 which is slightly higher than the average for 2015 (at the time of writing of this entry that average for 2015 stood at $55 a barrel).

Comparing current trends with the position last summer, the price of Brent Crude has fallen by more than 50% from its peak price of $115 per barrel last summer.

That’s great news for economies that depend on oil imports but not particularly good news for oil producers like Trinidad and Tobago.

What happens if China continues to stumble, let alone falls?

What has happened in China in the last month is far from pretty (excluding the running of Usain Bolt and Mo Farah both of which were perfect examples of extreme beauty).

On the back of sharp falls on China’s stock markets in July, Beijing brought in emergency measures in an attempt to stabilise prices and shore up confidence in what is the world’s second largest economy.

A surprise currency devaluation in the first two weeks of August highlighted in glorious technicolour what the world has suspected for some time. If China stumbles, let alone falls, the rest of the world will be in deep trouble.

The extent of the problems China faces can be illustrated in one simple fact: the one-off devaluation of the yuan is the biggest devaluation in that currency in over two decades, with the Central Bank allowing the currency to weaken in value by nearly 2% in one day.

Looking at the numbers, Moody’s now estimates that the official measure of growth in China will fall from 7.4% in 2014 to 6.8% in 2015, and will continue to track down in 2016 to 6.5%.

That’s not good news for the rest of the world.

What about the United States of America?

For over the last year commentators have expected a rise in US Interest rates.

What is certain is that the signals are clear with the US Central Bank paving the way for what will effectively be the first increase in the cost of borrowing in the United States in nine years. When the rise comes is anyone’s guess, but it may come as soon as next month.

The effect of an increase in US interest rates may prove to be a double edged sword. In the short term any increase will likely fan an increased volatility in emerging market economies currency, bonds, and stock markets, as money floods out of emerging markets and into US denominated investments.

Is the Eurozone now settled?

Looking at the Eurozone as a whole, Moody’s anticipates that economic growth will rise from 0.9% in 2014 to 1.5% in both 2015 and 2016. The main drivers of this growth will be lower oil prices and a weaker Euro. Some are more pessimistic with Fitch recently concluding that the medium term growth prospects in the Eurozone are generally going to be “weak”.

One factor that we all have to consider is the position of Greece. The threat of GREXIT (discussed in an earlier blog entry) has receded significantly since early July.

However, although Athens did manage to negotiate a last minute 86 billion euro bailout the prospects for the Greek economy as a whole remain south of bleak. Most commentators expect that the Greek economy will continue to sharply contract as capital controls begin to bite and dampen down any prospect of the economy even remotely moving forward. Life in Greece must be nasty and at times seem quite brutish.

And what about the United Kingdom?

Growth in the United Kingdom – at least according to Moody’s – appears both “robust and broad based.” That doesn’t mean it’s all good news or plain sailing for the UK. Growth of 2.7% expected in 2015 is very likely to slow to 2.4% in 2016 with the prospect of the Bank of England beginning to raise interest rates on a gradual basis from early next year.

Not everyone agrees. The last figures released by the Central Statistical Office suggest earnings growth has already stalled in 2014 despite the benefit of lower fuel prices driving the economy forward.

And the prospects for Trinidad and Tobago?

Trinidad and Tobago’s economic prospects are tied heavily to the performance of its energy sector.

While increased production and exploration activity may provide slight momentum for growth, sustained low energy prices are likely to weigh heavily on revenues available to the central government. Lower oil and natural gas prices will also act as a disincentive on additional investment and exploration in the hydro carbon sector of the economy at least in the short term. The energy sector is the major driver of GDP and consequently the risk is heavily to the downside for the economy.

The new PNM administration that won yesterday may have to consider an early currency devaluation as other oil economies like Canada and Russia have long done in the face of plummeting oil prices

That said, it’s not all bad news.

The continued expansion of the non-energy sector will be the major driver of economic growth in Trinidad and Tobago moving forward over the next few years.

This expansion of the non-energy sector will be fuelled to a very great extent by continued growth in consumer demand. The rate of consumer loan growth remains strong coming in at 9.0% year on year for April 2015 (the last published figures at the time of writing of this blog entry) continuing a steady recovery that has taken place in the last few years.

In addition, the unemployment rate continues to fall and wage increases in sectors such as transport, storage and communications, as well as chemicals and distribution in the last few quarters have also helped to bolster household incomes and encourage consumption.

Will the world’s economies ever shake off the legacy of the financial crisis?

With GDP growth limited to around 3% per annum it may take another 5 years for the world’s major economies to shake off the lingering effects of the financial crisis that commenced in 2007.

This assumes no further shocks to the system to derail even this most modest forecast of growth.

The road we all have to travel is clearly a long one with many potential pot holes on route.

Important Reminder

If you have a portfolio now is the time to make sure that it is balanced and serves your long term investment objectives based upon what we expect to happen in the World economy moving forward.

If you need help in this respect please contact Osmond Prevatt our Portfolio Manager at 1 868 628 1175 or


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