Despite U.S. Fed hikes, global liquidity will remain extremely abundant due to monetary easing by other central banks (ECB, BoE, BoJ, China), according to Euler Hermes, the worldwide leader in trade credit insurance. In its updated risk analysis for Q3 2016, the company notes, however, that global growth should reach its lowest level in 2016 (2.4%) and will in 2017 be below 3% for the 7th consecutive year, driven up by the US and emerging markets.
“Global liquidity should remain abundant due to further monetary easing by major central banks, despite the U.S. Fed hikes,” said Ludovic Subran, chief economist at Euler Hermes. “However, low rates and monetary policies are far from uniform, so liquidity can move rapidly across the regions, generating volatility and turbulences.”
In this context, Euler Hermes identified various alerts coming from the regional tectonic plates:
The U.S. economy should benefit from resilient consumption due to increasing confidence and private investment. The stronger economic activity will alleviate the downward pressures on main suppliers of the industrial sector. The expected Fed hikes have limited impact on emerging market currencies. Both presidential candidates call for a fiscal package to support growth – expected to be at +1.7% in 2016 and +2.2% in 2017.
Fine-tuned macro policies in China are aimed at supporting growth, expected at +6.5% in 2016 and +6.4% in 2017. There will, however, be lower demand for foreign goods, negative price pressures and financial stress.
In Europe, growth is expected to remain stable at +1.6% due to a better policy mix. The ECB’s Quantative Easing (QE) program is Europe’s biggest safety belt and the Juncker plan has doubled to €630 bn. The region is characterized by multiple political uncertainties including Brexit, upcoming elections and several points of tension.
Emerging markets will face various situations. Expected growth of +3.8% in 2016 and +4.4% in 2017 will, respectively, contribute to 1.5pp and 1.7pp of global growth. While Brazil and Russia should exit recession, the credit crunch and exchange rate crisis impact several other countries such as Mexico, Nigeria, Turkey or Venezuela.
The main “tectonic shifts” – or how the world is moving slowly but strongly – are:
Despite the recovery, global growth is too low to prevent insolvencies from increasing. Insolvencies are expected to rise in most emerging countries in 2016 and in the USA, while decreasing in Western Europe. Worldwide, insolvencies are expected to increase for the first time since the 2009 global financial crisis. Big ticket bankruptcies are on the rise, although the number of insolvencies globally has not increased significantly in H1 2016 vs H1 2015. Payment terms are not improving globally: 1 in 4 companies is paid after 3 months.
Commodity prices should remain low, with a neutral effect on global growth in 2017. For commodity exporters, the economic situation should progressively stabilize, following two years of adjustment.
Over 2016-2017, global trade growth should remain far below its pre-crisis average (+7%). The main factors include demand shocks (ongoing Brazil and Russian crises), structural adjustment in demand (China’s rebalancing, energy autonomy in the U.S.), tighter U.S. monetary policy implying currency depreciations, raising import costs and protectionism.
“More than 350 protectionist measures have been recorded worldwide in H1 2016, related to both trade in goods and in services,” added Subran. “In addition, the overall electoral calendar, combined with some political and social hotspots will continue to generate turbulences until the end of 2017.”
The savings glut remains a challenge and a drag on investment. US$7trn in cash remains glued to balance sheets, including US$2trn in the U.S. Yet, cross-border M&A is growing, reflecting a non-organic approach to internationalizing activity.
“Monetary support is like magma that grows and flows rapidly underground,” concluded Ludovic Subran, chief economist at Euler Hermes. “The magma is good because it ‘supports’ the plate, but from time to time, it can lead to sudden eruptions - like a fall in oil prices, or bubbles. The main global regions are like tectonic plates: they move slowly, but can create friction between one another.”
Euler Hermes has updated its Q3 2016 country risk rating:
Countries with better ratings: Cyprus, Portugal
Countries with worse ratings: Mexico, Mongolia, Papua New Guinea, Trinidad & Tobago
All other country ratings remain unchanged.