LONDON: The recent political turmoil in Europe and financial convulsions in China will not do serious damage to global growth—unless they get a lot worse, according to IHS Global Insight’s July World Flash, an update on the global economy from IHS Chief Economist Nariman Behravesh and IHS Senior Research Director Sara Johnson.
In the past month, the headlines have been truly scary. Greece came very close to exiting the Eurozone and China suffered a stock market rout. Fortunately, the contagion from these events has been mild, as evidenced by limited volatility in global financial markets and foreign-exchange rates. Banks in the rest of the world have dramatically reduced their exposure to Greek debt, while European authorities have set up firewalls to insulate the rest of Europe from the fallout from the ongoing Greek crisis.
In China’s case, the stock market is relatively closed and its equity bubble was largely financed with local money. Given the Chinese stock market’s weak linkages to consumer and business spending, the impact of its recent plunge on growth is likely to be limited.
United States: Growth reverts to its underlying 2.5‒3.0% rate. After real GDP declined at a 0.2% annual rate in the first quarter, IHS predicts it will grow 2.4% in the second quarter and an average of 2.9% in the third and fourth quarters. Consumer spending will provide the solid foundation for US economic growth, supported by strong gains in employment, incomes, and net worth. Housing and non-energy capital spending will also contribute to growth, while net exports, inventory investment, and energy-related capital expenditures will be a drag.
Europe: Other than on Greece itself, the impact of the Greek drama is likely to be small. Even with the recent agreement for a third bailout, the risk of Greece exiting the Eurozone is far from over. The good news is that due to the safeguards that have been put in place and the European Central Bank’s commitment to keeping the Eurozone together, the risk of a Greek exit should now pose much less of a threat to growth than was the case in 2012. Consequently, IHS has lowered 2016 Eurozone growth by only 0.2 percentage points, to 1.7%. However, Greece is expected to suffer through another two years of contraction.
China: The scary stock market plunge will have limited effects on non-financial sectors. Even with second-quarter growth holding steady at 7.0% year on year (y/y), the steep sell-off in China’s stock markets creates a challenge for the Chinese government. The year’s growth target will be difficult to hit as the contribution from financial services declines in the second half. The real influence on the domestic economy is likely to be limited to short-lived volatility in industrial sector profits. The most substantial hit to the economy over the medium and long terms will be to investor confidence, given the rapid regulatory changes by the government as well as doubts those actions raise about reform commitment within the financial sector.
Other large emerging markets: The picture darkens again, as commodity prices drop. The IHS Materials Price Index is at its lowest level for 2015. This, along with any weakening of Chinese demand for raw materials, will aggravate the challenges facing commodity-exporting emerging markets. Specifically, Russia’s already dire outlook could be exacerbated by the recent drop in oil prices. In Brazil, rising inflation is forcing the central bank to raise interest rates at a time when the economy is already contracting.