2016 got off to a flying start. An assortment of fear factors emanated from China. Jittery stocks have rattled investors worldwide. Oil prices continued to send shivers down many companies and governments’ spines. And emerging markets’ currencies are on a downward spin.

More nervous times ahead? Maybe. But one of the best cures for economic anxiety is a sober analysis.

That is what we try to offer in a new Economic Outlook report, titled “The 7 dwarfs of global growth”. By mentioning 'dwarfs' we do not imagine a fairytale world economy that lives happily ever after. In fact, the report identifies and analyzes seven key drivers of GDP growth that are simply too small for comfort. GDP is forecast to grow by 2.8% in 2016, and it will remain below +3% for the sixth consecutive year with no genuine acceleration in sight. 

But why? Meet the dwarfs, the Evil Queen of insolvencies, and business investment Snow White. [more]

Starting with Sleepy global trade, it will grow by +0.9% in value in 2016 and +3.7% in volume, compared to +6% each year between 2000 and 2010. Last year global trade contracted by -9% for the first time since 2009. Why? Because of lower commodity prices and the currency carnage. And more importantly, the global economic landscape is undergoing significant structural adjustments. First, value chains are shortening as technology and rising wages erode comparative advantages of Asian and Central European factory countries. Secondly, China’s industrialization phase seems to have come to an end. The rebalancing to services reduces sales opportunities for primary and intermediate goods suppliers. 

Then you have Grumpy emerging markets: 2015 was a very tough year for emerging markets and some countries will remain highly vulnerable to economic shocks and market volatility in 2016. The BRuNTS (Brazil, Russia, Nigeria, Turkey, South Africa) continue to face a trio of challenges: low commodity prices, the Chinese slowdown and the tightening of US monetary policy. These countries also suffer from their own internal pressures such as inflation, weak domestic demand and socio-political tensions. Grumpy indeed.

As for timid commodity prices, oil prices lead the bashful pack. Even if Brent prices stabilize at record low levels, the problem is how long they might stay at rock bottom. Think about what a prolonged counter-oil shock might do to the business model of countries which pump energy to make ends meet. 

Volatility will continue for sneezy financial markets’ as currency carnage and challenging commodity markets pile the pressure. Euler Hermes forecasts, however, that the price for basic input commodities such as nickel, soybeans and zinc could stabilize in 2016. In contrast, the outlook for manufacturing commodities such as coal, copper, iron ore or steel is bleaker, and prices could fall anew by -10%. Currencies could also experience a second round of depreciations especially in Brazil, China, Russia, South Africa, and Turkey to name a few hotspots. 

So who can save the world? Alas, it will not be the happy domestic consumers. Many countries are becoming more inward-looking, introducing protectionist measures to stimulate domestic consumption growth over imports. This trend is striking in emerging countries such as India, where consumption has grown by 13.2% since 2013 whereas imports have grown a paltry 2%. And in developed markets, the boost from low oil prices will abate as inflation edges up. 

At least the doc of policy mix is generously administering liquidity. Asset purchases by the Bank of Japan, the ECB and the PBOC and a strong increase in Chinese public expenditures are helping to keep growth on track. In Europe, fiscal austerity is over. Most countries announced corporate tax rate or targeted stimulus packages for 2016.

Dopey decisions and political risk are another issue. From the risk of Brexit through geopolitical tensions around Russia or Iran​, to a stacked calendar of elections in some of the largest economies - including the U​S - uncertainties abound.

Wondering about other key characters? The Evil Queen of insolvencies is here. expect a +1.0% in company bankruptcies worldwide this year. And last but not least Snow White of business investment is finally reawakening especially in Europe.

So if there is a moral to this tale, here it is: more than ever, in 2016, differentiation will be the name of the game. Emerging markets and advanced economies are, sadly, heading in quite different directions.


Ludovic Subran

Chief Economist

Euler Hermes

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