Category Archives: Advanced economies

12/4/16: Look, Ma… It’s [not] Working: IMF & the R-word

A handy chart from the IMF highlighting changes over the last 12 months in forecast probability of recession 12mo forward across the global economy

Yes, things are getting boomier... as every major region, save Asia and ROW are experiencing higher probability of recession today than in both October 2015 and April 2015, and as probability of a recession in 2016 is now above 30 percent for the Euro area and above 40 percent for Japan.

In that 'repaired' world of Central Banks' activism (described here: we can only dream of more assets purchases and more government debt monetizing, and more public investment on things we all can't live without...

Because, look, it's working:

12/4/16: IMF (RIP) Growth Update: Risks Realism, Policy Idiocy

IMF WORLD ECONOMIC OUTLOOK update out today (we don’t yet have full data set update).

Top line forecasts published confirm what we already knew: global economic growth is going nowhere, fast.  Actually, faster than 3 months ago.

Run through top figures:

  • Global growth: In October 2015 (last full data update we had), the forecast for 2016-2017 was 3.6 percent and 3.8 percent. Now, it is 3.2 percent and 3.5 percent. Cumulated loss (over 2016-2017) of 0.725 percentage points in world GDP within a span 6 months.
  • Advanced Economies growth: October 2015 forecast was for 2.2% in 2016 and 2.2% in 2017. Now: 1.9% and 2.0%. Cumulated loss of 0.51 percentage points in 6 months
  • U.S.: October 2015 outlook estimated 2016-2017 annual rate of growth at 2.8 percent. April 2016 forecast is 2.4% and 2.5% respectively, for a cumulative two-years loss in growth terms of 0.72 percentage points
  • Euro area: the comatose of growth were supposed to eek out GDP expansion of 1.6 and 1.7 percent in 2016-2017 under October 2015 forecast. April 2016 forecast suggests growth is expected to be 1.5% and 1.6%. The region remains the weakest advanced economy after Japan
  • Japan is now completely, officially dead-zone for growth. In October 2015, IMF was forecasting growth of 1% in 2016 and 0.4% in 2017. That was bad? Now the forecast is for 0.5% and -0.1% respectively. Cumulated loss in Japan’s real GDP over 2016-2017 is 1.005 percentage points.
  • Brazil: Following 3.8 contraction in 2015 is now expected to produce another 3.8 contraction in real GDP in 2016 before returning to 0.00 percent growth in 2017. Contrast this with October WEO forecast for 2016 growth at -1% and 2017 forecast for growth of +2.3% and you have two-years cumulated loss in real GDP of a whooping 5.08 percentage points.
  • Russia: projections for 2016-2017 growth published in October 2015 were at -0.6% and 1% respectively. New projections are -1.8% and +0.8%, implying a cumulative loss in real GDP outlook for 2016-2017 of 1.41 percentage points.
  • India: The only country covered by today’s update with no revisions to October 2015 forecasts. IMF still expects the country economy to expand 7.5% per annum in both 2016 and 2017
  • China: China is the only country with an upgrade for forecasts for both 2016 and 2017 compared to both January 2016 and October 2016 IMF releases. Chinese economy is now forecast to grow 6.5% and 6.2% in 2016 and 2017, compared to October 2015 forecast of 6.3% and 6.0%.

Beyond growth forecasts, IMF also revised its forecasts for World Trade Volumes. In October 2015, the Fund projected World Growth to expand at 4.1% and 4.6% y/y in 2016 and 2017. April 2016 update sees this growth falling to 3.1% and 3.8%, respectively. And this is without accounting for poor prices performance.

In short, World economy’s trip through the Deadville (that started around 2011) is running swimmingly:

Meanwhile, as IMF notes, “financial risks prominent, together with geopolitical shocks, political discord”. In other words,we are one shock away from a disaster.

IMF response to this is: "The current diminished outlook calls for an immediate, proactive response… To support global growth, …there is a need for a more potent policy mix—a three-pronged policy approach based on structural, fiscal, and monetary policies.” In other words, what IMF thinks the world needs is:

  1. More private & financial debt shoved into the system via Central Banks
  2. More deficit spending to boost Government debt levels for the sake of ‘jobs creation’, and
  3. More tax ‘rebalancing’ to make sure you don’t feel too wealthy from (1) and (2) above, whilst those who do get wealthy from (1) and (2) - aka banks, institutional investors, crony state-connected contractors - can continue to enjoy tax holidays.

In addition, of course, the fabled IMF ‘structural reforms’ are supposed to benefit the World Economy by making sure that labour income does not get any growth any time soon. Because, you know, someone (labour earners) has to suffer if someone (banks & investment markets) were to party a bit harder… for sustainability sake.

IMF grafts this idiocy of an advice onto partially realistic analysis of underlying risks to global growth:

  • “The recovery is hampered by weak demand, partly held down by unresolved crisis legacies, as well as unfavorable demographics and low productivity growth. In the United States, ..domestic demand will be supported by strengthening balance sheets, no further fiscal drag, and an improving housing market. These forces are expected to offset the drag to net exports coming from a strong dollar and weaker manufacturing.” One wonders if the IMF noticed rising debt levels in households (car loans, student loans) or U.S. corporates, or indeed the U.S. Government debt dynamics
  • “In the euro area, low investment, high unemployment, and weak balance sheets weigh on growth…” You can’t but wonder if the IMF actually is capable of seeing households of Europe as still being somewhat economically alive.

But the Fund does see incoming risks rising: “In the current environment of weak growth, risks to the outlook are now more pronounced. These include:

  • A return of financial turmoil, impairing confidence. For instance, an additional bout of exchange rate depreciations in emerging economies could further worsen corporate balance sheets, and a sharp decline in capital inflows could force a rapid compression of domestic demand. [Note: nothing about Western Banks being effectively zombified by capital requirements uncertainty, corporate over-leveraging, still weighted down by poor quality assets, etc]
  • A sharper slowdown in China than currently projected could have strong international spillovers through trade, commodity prices, and confidence, and lead to a more generalized slowdown in the global economy. 
  • Shocks of a noneconomic origin—related to geopolitical conflicts, political discord, terrorism, refugee flows, or global epidemics—loom over some countries and regions and, if left unchecked, could have significant spillovers on global economic activity.”

The key point, however, is that with currently excessively leveraged Central Banks’ balance sheets and with interest rates being effectively at zero, any of the above (and other, unmentioned by the IMF) shocks can derail the entire wedding of the ugly groom with an unsightly bride that politicians around the world call ‘the ongoing recovery’. And that point is only a sub-text to the IMF latest update. It should have been the front page of it.

So before anyone noticed, almost a 1,000 rate cuts around the world later, and roughly USD20 trillion in various asset purchasing programmes around the globe, trillions in bad assets work-outs and tens of trillions in Government and corporate debt uplifts, we are still where we were: at a point of system fragility being so acute, even the half-blind moles of IMF spotting the shine of the incoming train.

19/2/16: OECD Data Sums Up the ‘Repaired’ Advanced Economies State of Disaster

Just because everything has been so thoroughly repaired when it comes to the Advanced Economies, growth of real GDP in the OECD area has been falling for three consecutive quarters through 4Q 2015. Of course, you wouldn't know as much if you listen to exhortations of Europe's leaders, but... per OECD latest statistical update, in 2Q 2015, q/q real GDP growth across the advanced economies was 0.6%, falling to 0.5% in 3Q 2015 and to 0.2% in 4Q 2015. Which puts 4Q 2015 growth of 0.2% at lowest level since 1Q 2013.

In the U.S., economic growth slowed to 0.2% in the fourth quarter, against 0.5% in the third quarter, marking second consecutive quarter of growth slowdown. Small uptick in UK growth to 0.5% in 4Q 2015 still puts end of 2015 growth rate at below 1Q 2010-present average and at joint second lowest reading since 1Q 2013.

And there has been no acceleration in growth in the euro area's Big 4 for two consecutive quarters now, with both Italy and France dancing dangerously closely to hitting negative growth and Germany posting lacklustre growth since 1Q 2015.

Per OECD release, "Year-on-year GDP growth for the OECD area slowed to 1.8% in the fourth quarter of 2015, down from 2.1% in the previous quarter. Among the Major Seven economies, the United Kingdom (1.9%) and the United States (1.8%) continued to record the highest annual growth rates, although both down from a rate of 2.1% in the previous quarter. Japan recorded the lowest annual growth rate, 0.7% compared with 1.6% in the previous quarter."

About that 'normalised' and 'repaired' global economy, thus... 

10/1/16: Crisis Contagion from Advanced Economies into BRIC

New paper available: Gurdgiev, Constantin and Trueick, Barry, Crisis Contagion from Advanced Economies into Bric: Not as Simple as in the Old Days (January 10, 2016). 

Forthcoming as Chapter 11 in Lessons from the Great Recession: At the Crossroads of Sustainability and Recovery, edited by Constantin Gurdgiev, Liam Leonard & Alejandra Maria Gonzalez-Perez, Emerald, ASEJ, vol 18; ISBN: 978-1-78560-743-1. Link:


At the onset of the Global Financial Crisis in 2007-2008, majority of the analysts and policymakers have anticipated contagion from the markets volatility in the advanced economies (AEs) to the emerging markets (EMs). This chapter examines the volatility spillovers from the AEs’ equity markets (Japan, the U.S and Europe) to four key EMs, the BRIC (Brazil, Russia, India and China). The period under study, from 2000 through mid-2014, reflects a time of varying regimes in markets volatility, including the periods of bubble, the Global Financial Crisis and the European Sovereign Debt Crisis, the Great Recession and the start of the Russian-Ukrainian crisis. To estimate volatility cross-linkages between the advanced economies and BRIC, we use multivariate GARCH BEKK model across a number of specifications. We find that, the developed economies weighted return volatility did have a significant impact on volatility across all four of the BRIC economies returns. However, contrary to the consensus view, there was no evidence of volatility spillover from the individual AEs onto BRIC economies with the exception of a spillover from Europe to Brazil. The implied forward-looking expectations for markets volatility had a strong and significant spillover effect onto Brazil, Russia and China, and a weaker effect on India. The evidence on volatility spillovers from the advanced economies markets to emerging markets puts into question the traditional view of financial and economic systems sustainability in the presence of higher orders of integration of the global monetary and financial systems. Overall, data suggests that we are witnessing less than perfect integration between BRIC economies and advanced economies markets to-date.

30/12/15: Blink by 25bps, chew through billions: U.S. rates ‘normalization’

In a post yesterday, I mentioned USD3 trillion hole in global bonds markets looming on the horizon as the U.S. Fed embarks on its cautious tightening cycle. Now, couple more victims of that fabled 'normalization' that few in the markets expected.

First up, U.S. own bonds:

Source: @Schuldensuehner 

As noted, US 2-year yields are now at 1.09%, their highest level since April 2010 and roughly double January 2015 average. Now, estimated interest on U.S. federal debt in 2015 stood at around USD251 billion for publicly held debt of USD13,124 billion. Now, suppose we slap on another 0.55%-odd on that. That pushes interest payments on publicly held portion of U.S. debt pile to over USD323 billion. Not exactly chop change...

And another casualty of 'normalization' - global profit margins per BCA Research:
"Over the past two decades, the G7 yield curve has been an excellent leading indicator of global margins. Currently, not only are short-term borrowing costs becoming prohibitive, at the margin, but the incentive to raise debt and retire equity to boost EPS is diminishing. This suggests that profit margins have likely peaked for the cycle."

Here's a chart showing both:
Source: BCA Research

Now, absence of margins = absence of capex. And absence of margins = profits growth on scale alone. Both of which mean things are a not likely to be getting easier for global growth.

Now, take BCA conclusion: "Finally, global junk bonds are pointing to a drop in equities in the coming months, if the historical correlation holds. Indeed, we are heeding the bond market’s message, and are concerned about margin trouble and the potential for an EM non-financial corporate sector accident: remain defensively positioned."

In other words, given the leverage take on since the crisis, and given the prospects for organic growth, as well as the simple fact that advanced economies' corporates have been reliant for a good part of decade and a half on emerging markets to find growth opportunities, all this rates 'normalizing' ain't hitting the EMs alone but is bound to under the skin of the U.S. and European corporates too.

Good luck trading on current equity markets valuations for long...