Opening Statement from the October 2015 CCPM Forecaster

Opening Statement from the October 2015 CCPM Forecaster

Originally published on October 4, 2015

On September 18^th the Federal Reserve announced its decision to keep interest rates unchanged in accord with our expectations. Notably, the Fed’s mention of weak inflation caused commodities and equities to sell off due to deflation fears. With little surprise, emerging market equities rallied after the Fed made its announcement (rising rates in the US would lead to more capital outflows from the EMs).

On Friday October 2, the BLS released disappointing employment data from September, with only 142,000 new jobs added versus around 200,000 expected. In addition, jobs data from the previous three months were revised downward. One could now argue that signs of weakening in the US economy have increased the chance of a rate hike in December. Otherwise the Fed could miss the window of opportunity to increase rates for an extended period of time because the US economy (at best) is not expected to make much improvement in 2016. Meanwhile, most emerging market economies are expected to weaken further, adding to the already worrisome level of global economic, financial and geopolitical risks.

Over the past two years, economic growth has been led by advanced nations. In contrast, emerging and developing nations have been laggards. As you might recall, this situation is in contrast to what was observed after the global financial crisis, whereby emerging economies uncharacteristically helped pull advanced economies out of a severe recession.

This was by no means a smoke-and-mirrors act. As we have pointed out on numerous occasions, the global economic stimulus package led to sufficient demand required to refuel the emerging markets manufacturing engine. The only problem was that the stimulus did not create lasting demand.

In early 2010 we concluded the global stimulus of 2009 would be depleted by mid-2011. Thus, unless the structural issues had been resolved or significant progress was being made by that time, we further concluded the global economy would begin to weaken. 

Instead of addressing structural issues within the economy head on, policy officials and economists have continued to focus on cyclical remedies. As a result, the prolonged weakness in the global economy has again been unmasked. This time around it’s the emerging markets that are in trouble.  

By year’s end, emerging market economies are likely to have recorded their fifth consecutive year of declining rates of economic growth. More recently, emerging market economies have added sizable risk to the global economy.

Adding to the weakness in emerging economies is the fact that private investment remains low in the EU and has declined significantly over the past two years in most emerging economies. In addition to demand-induced weakness in commodities, we expect currency devaluation to continue for many nations.

What we have witnessed over the past several years cannot be explained by economic cycle theory. The global economy remains plagued with both legacy assets from the financial crisis as well as deep-rooted structural issues stemming largely from misaligned trade policy and other manifestations of globalization.

The structural problems embedded within the economy have accounted for the chronically high unemployment rates seen in Europe as well as the US (we do not believe the employment data in the US reflects full employment).