x Abu Dhabi, UAEMonday 22 January 2018

Hurdles on the home stretch of the global recession

Stalemate in Italy's elections and the budget talks in the United States provided a nagging reminder of the headwinds still facing the global economy.

Stalemate in Italy's elections and the budget talks in the United States last week provided a nagging reminder of the headwinds still facing the global economy as it staggers along the path to recovery.

It follows two months of relative calm as negative news flows from the euro zone faded and mounting evidence from America and China, the two largest economies, pointed to a rebound. The optimism was reflected in a bull run across global financial markets.

But events last week proved the path to recovery is still paved with pitfalls.

First came Italy's inconclusive election result, which renewed fears about the country's ability to solve its budget troubles and triggered a resurgence of euro-zone angst. Then came the US government deadlock over US$85 billion (Dh312.2bn) in spending cuts that came into force late Friday.

"I don't think we're out of the woods," says Julian Jessop, the chief economist at Capital Economics. "The first quarter of this year may be as good as it gets. The global economic recovery, although it's likely to continue, will still be likely subdued. Given the amount of monetary stimulus you would expect a much stronger recovery."

Economists feel most positive about prospects in the US and China. After acting as a deadweight, dragging the rest of the world to the edge of the abyss four and a half years ago, the US is now helping to lead the recovery. The housing market is improving, joblessness has fallen below 8 per cent and household wealth has recovered most of the plunge during the financial crisis.

America's move towards energy self-sufficiency is also helping. Oil output is the highest in 15 years and natural gas is also cheap.

"We believe the US economy is in a strong position," says Robert Baur, the chief global economist at Principal Global Investors, a US asset manager. "This is helping to draw manufacturing back to the US."

Spending cuts from the so-called sequester will not have a "great overall economic impact", with growth rising from 2.5 per cent last year to 3 per cent this year, he says.

Activity is also picking up in China. Fears of a hard-landing have faded as the economy accelerates to 8 per cent growth, estimates Rajiv Biswas, the senior director and Asia-Pacific chief economist at IHS. The outlook is similarly rosy in other parts of Asia.

"Emerging Asia has remained resilient to the euro-zone crisis and will remain the fastest growing region of the global economy in 2013 and 2014," says Mr Biswas. "Asian growth is being buoyed by improving growth in China, a key export market for the rest of Asia, as well as very strong domestic demand in South East Asia."

But the fly in the ointment remains the euro zone. After five years of recession in some countries, the outlook is little better this year, at least until the second half.

Last year's concerns about a break-up of the single currency proved unfounded. But economists say years of fiscal austerity, bank deleveraging and weak domestic demand will hamper any prospect for any early rebound.

Aside from the fallout from Italy's election, other risks exist in the periphery too.

"With risks of Spain requiring an EU bailout and Greece still in a downwards economic spiral, episodes of heightened risk aversion in financial markets around the EU crisis can be expected this year and next," says Mr Biswas.

Buoyed by strong demand in Asia and a steady oil price, the GCC should continue to outperform most other parts of the world. Expansion will dip slightly from 6 per cent last year to 4.8 per cent this year, forecasts the Centre for Economics and Business Research.

But economists have been quick to warn that global growth and the rally in financial markets may not be sustainable.

"In the first quarter of this year we started to get close to the targets we set for the first half of the year," says Mr Jessop. "That may change. You can't get strong economic growth and continued stimulus. Our assumption is that global growth will disappoint."