Global Growth: The FLOPS

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​"You write a hit the same way you write a FLOP"
Alan J Lerner was a master of the written and sung word, a man whose popular musicals and films won the most prestigious awards. He also knew what failure meant. And so he was well positioned to quip about the thin line between a hit and a disastrous flop.
The world economy is so sluggish these days that some analysts resort to fatalism. But doomsayers should hold their breath: a meltdown is not forthcoming. Yet the Economic Research team at Euler Hermes believes that global economy’s growth will be weaker this year than in 2015, with only a +2.5% rise in GDP.
Even worse, we are stuck in a multi-low-speed world. Advanced economies will grow by a modest +1.8% this year while emerging markets need more time to bottom-out (+3.6%, a new record low since 2009). As a result, countries accounting for 70% of global GDP will be slowing down or in recession and our Global Insolvency Index is expected to increase (+2%) for the first time in six years.
What’s going on?
The latest in-depth study of the world’s economy by Euler Hermes refers to the main culprits as the FLOPS. [more]

By the FLOPS acronym we refer to bottlenecks that asphyxiate the economy.
• Subdued trade and investment Flows – and antsy capital ones
• Divergent Liquidity with horns of plenty and drought-prone asset classes
• Low for longer Oil and commodity prices triggering unwanted second-round effects
• Hesitant and uncoordinated Public Policies
• And – Surprise!  - unwelcome political developments.
To get a broader view of the situation, feel free to read on. Or just peruse the full report, available online and for download.

Flows are anemic. Global trade is set to contract once more in 2016 and mark a decrease of -2% in value, after a fall of -10% last year. Judging by the sheer number and value of cross-border mergers and acquisitions, investment flows may be picking up a notch. Yet capital flows remain wobbly. Today, this is the issue the World Economy is facing: capital flows that rise and fall, wreaking havoc on currencies and emerging market companies.

Liquidity, already abundant, should grow by +6% this year while monetary policies are less divergent. Yet transmission to the real economy remains limited. This poses a major issue for sectors impacted by high debt levels and anemic turnovers, such as commodities and machinery. Liquidity pockets remain local, in Europe for instance, in contrast with emerging markets where liquidity is scarce, especially when it comes to extending credit for companies. As a result, 2016 will see the return of non-payment risk.  After six consecutive years of declines be, corporate insolvencies worldwide will increase by +2%, mainly due to the turmoil in emerging countries.

Oil is either too costly or too cheap. While oil prices are set to remain low for longer, negative effects begin to appear. Countries whose revenues are reliant on oil exports are often those that spent lavishly when the price per barrel was sky high. Saudi Arabia and the Arab states of the Persian Gulf, Venezuela, Equatorial Guinea, Angola, Gabon, and Azerbaijan are part of the list. Social tensions might escalate if governments push forward more subsidy cuts or tax hikes in an effort to compensate for the loss in revenues.

Public Policies are too hesitant and lack coordination. Thus, a much needed strong stimulus to investment does not materialize. Rigorous fiscal consolidation and debt elimination haunt European economies less than in recent times. But the pace is not fast enough to spur growth. At the same time, emerging markets begin to feel the blow of austerity measures aimed at decreasing public deficits. Even if in some countries such as China, Turkey or India, sustained high public expenditure contributes to growth and rising debt, the private sector is spared from reducing its debt burden.

Surprises – last but not least of the FLOPS – have become more frequent over the last few years. Several governments will have to face serious tests: Brexit, US elections, interim governments (Spain, Thailand) come to mind. Add Europe’s everlasting stress test and the risk of escalation in the Middle East region, and you get a heightened level of nervousness.
The risk posed by Brexit, namely a British exit from the EU, is a case in question. It could be costly for the UK, with Export losses of up to 30 billion pounds and almost 200 billion in investments are at stake. As for Europe, Ireland will be the country impacted the most. Germany and the Netherlands could also lose quite a lot, especially because of their high exports to the UK.

So yes, a wind of an impending ouch and imminent pain might be blowing. But only colossal and persistent FLOPs might push the world closer to a fully-fledged recession. 

Let's hope they fail to do that.

Ludovic Subran
Chief Economist
Euler Hermes
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