Crisis or not?

By Luisa Porritt

Global growth disappointed last year, and market sentiment is being driven by fears it will remain weak or even weaken through 2016. The factors worrying stock market investors are hardly new. For years there has been talk of China suffering from a hard landing, and its transition from a manufacturing-based economy to one that is services oriented is now becoming apparent. Markets are figuring out how to price that shift in and to what extent this will continue to impact global demand. Part of the uncertainty will be around timing: how long will this process take? What will replace Chinese demand? How successfully can the Chinese authorities manage the transition, and will China become more or less of a market economy as a consequence?

Oil is the other major ‘known unknown’. We’ve known since the beginning of last year that the price of oil had a long way to fall, but how far and for how long is difficult to quantify. This may start to become clearer in the coming months, as the long-awaited inclusion of both the US and Iran in export markets has happened and therefore will provide transparency about the level of supply. But as with China, there are big questions as to where future demand will come from. Oil remains an important source of energy, but is nonetheless a shrinking component of the overall energy mix for many countries.

The volatility across global stock markets is symbolic of problems facing the real economy, but that doesn’t mean a crisis will occur. As Adair Turner said last week on Radio 4’s Today programme, the banking sector is broadly in better shape than it was in 2008. Many systemically important banks are well capitalised and able to shoulder turmoil.

Business confidence however will be a key determinant of what happens next. A host of recent profit warnings from FTSE 100 companies suggests global growth is weighing on the minds of business leaders (though we should keep in mind the disproportionate weighting of energy and mining stocks in the index). Whether this translates as an economic crisis will depend on the prevailing narrative that unfolds, which is currently negative thanks to comments by RBS and some particularly bearish economists. Like some others, I tend to believe in the concept of a ‘self-fulfilling prophecy’ and think we can avert a crisis if we look to the positives, for example a healthier banking sector and a possible bottoming out of the commodities price fall this year.

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