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Global economic outlook for 2016

On 13 October 2015 the ECCT hosted a Premium Event lunch to provide a global economic outlook and implications for financial markets in 2016. The event featured a presentation and Q&A session with guest speaker Klaus Baader, Chief Economist of the Asia Pacific region for Societe Generale Corporate & Investment Banking.

According to Baader, global economic growth is now being driven by advanced economies (especially the United States, Europe and Japan), unlike the past few years, which has been driven by emerging markets.

On the US economy, he believes that all the data supports solid growth in 2H15 and 2016 and that domestic strength will offset external weakness. In Europe he expects growth that is above the long-run average. According to Baader, deleveraging in Europe appears to have ended and more credit is flowing to businesses and household mortgages. In China, while the officially-reported 7% growth in 2Q15 does not hold much water, growth in China is still much higher than global counterparts. Baader is also optimistic that "Abenomics" (the policies of Prime Minister Abe) in Japan will boost Japan's economy.

According to Baader, part of the reason for the slowdown in global trade growth rates since 2011 is that the rebound phase following the global financial crisis has ended and that levels have normalized. However, advanced countries' imports are only just beginning to grow after a long period of stagnation and the sudden weakness in emerging economies' imports is a new worry.

Baader believes that inflation will begin to rise again as a result of monetary policy and a rise in commodity prices. SG analysts believe commodity prices are close to bottoming out. For example, after supply side adjustments, they believe oil prices (Brent crude) are close to a low of US$45 per barrel and are likely to rise to around US$75 in the medium term.

It is not exactly clear what led to a sharp drop in momentum in emerging markets, especially in Asia, starting early in 2015. Things were looking good at the beginning of the year on the back of stronger domestic demand recoveries in advanced economies (Asia's export markets), weaker oil prices (which are a boon for the majority of Asian economies) and the fact that central banks cut interest rates to stimulate domestic demand. However, the most likely explanation is that weakness in China is greater than the reported numbers suggest. China's imports from Asian economies have dropped sharply in 2015, when viewed from the perspective of China (and priced in RMB) but the picture is less clear when viewing export data from Asian countries to China in local currencies. While Taiwan's exports to China have seen a steady decline all year (in NT dollar terms), exports from Japan and South Korea to China have levelled off in 2015 while exports to China from Indonesia, Malaysia, Thailand and Singapore have actually risen in 2015 when measured in local currencies. This underlies the importance of taking into account currency factors in the analysis of trade figures.

Baader is not concerned about China in the near term. He expects authorities to continue with stimulus measures. He believes that the current economic model has passed its sell-by date but that President Xi seems to understand the need to rebalance GDP more towards consumption.

On currencies, SG analysts believe that the US dollar will continue to strengthen, helped by the shale oil and gas revolution, and reach parity with the euro by March 2016. Baader does not expect Chinese authorities to engage in a competitive devaluation war with other countries' currencies as it would be too politically costly at a time when Chinese authorities want to demonstrate that they are ready to join the elite club of global currencies that are part of the IMF's Special Drawing Rights. While a stronger dollar makes it more expensive to finance external debt, this is not a serious problem for Asian countries.

On China's recent stock market rout, Baader said that the bursting of the bubble was inevitable given that the most recent rally had been driven by margin trading. However, given that only about 10% of Chinese households invest in the equity market, the impact has not been that serious.

On the subject of US equities, Baader believes that US stocks are expensive. Moreover, given that the US labour market is tight, this will increase wage costs. In addition, rising commodity prices will add to operating costs, making it difficult for corporations to maintain margins. The prospect of lower profitability in future is likely to lead to selling pressure on US stocks, or at least sideways movement for the US stock market in the near future.

While Baader refrained from offering advice to Taiwan's political leaders, he sounded a note of caution about Taiwan being left out of bilateral and multilateral trade agreements.

On the subject internal European politics, Baader believes that the problems related to Greece have been dealt with for the moment. Rather than the prospect of a Grexit (Greece's exit from the European Union), he said he was more worried about the prospect of a Brexit (the UK's exit from the EU), which he believes would be disastrous for the UK's economy.