This year, the global economy is going to be seriously affected by the economic slowdown in China, which is the world’s second-largest economy after the USA. This is what the IMF’s chief economist thinks on the matter. During his interview to IMF Survey, he said that the global economy is going to be seriously influenced by emerging markets, including China as the major one.
As you probably know, China is moving from foreign investments, production and export to domestic consumption and services. The process is rather painful due to the weak balances of public companies and financial markets while the resource base lacks flexibility and rational distribution.
Global financial markets may be scared by China’s declining economic performance once it’s below the target set by the Chinese government. However, there are traditionally techniques designed to artificially help an underperforming economy reach the target. Still, these artificial steps may result in even bigger economic problems in the long run.
On top of that, it is important to keep in mind that foreign investors start fleeing emerging markets. There is a flight of capital amid partially exhausted reserves, which resulted in wider sovereign spreads and weaker national currencies amid sharply declining GDPs. Apparently, if commodities like crude oil keep on losing their value, the exporting nations are going to see even bigger economic challenges leading to devaluation, inflation, deficits etc.
At the same time, it is very important to take a look at the refugee problem currently seen in the EU. This is a challenge for the European labor market as well, not to mention the EU’s political system which may face strong opposition by the indignant locals tired of the refugees.
All of that is probably going to translate further into some major challenges for the global trade as well, especially as the global GDP is expected to slowdown. Moreover, the Fed is planning more interest rate hikes in 2016, which (if that’s the case) is going to make dollar assets even more popular while making investors flee emerging markets and other risky high-yield assets. This is a very important aspect to keep in mind and monitor this year.
