By Harris Parvaze
The year 2016, with few highly unprecedented events taking place, has proved to be an eventful year. From the onset, this year did not have the brightest start. Global markets witnessed volatility over uncertainties on the central banks’ policy rates. And, there was a growing concern over the fragility of emerging markets and their debt levels.
A year of many realisations
Many realised that the Markets in China were overpriced. And, there was a massive sell-off across the board as underlying fundamentals hadn’t been taken into account. China mostly constitutes retail investors. After sell-off margin calls are triggered to fund the maintenance margin, there is further sell-off of assets. This put intensive downward pressure on prices and investors were wary till the government stepped in and halted trade. Ultimately, the currency was devalued and there was stability, briefly.
Moreover, oil prices fell off a cliff. This is testament to the fact that either the global demand is weak, or that the pricing was overvalued during the years after the great recession. Soon the referendum held in the UK followed and it’s exit from the European Union was decided. This leaves little room left for an open trade agreement. The EU, now, is left with more uncertainties.
The most heated topic though, for most part of the year, was the US Presidential Election. Donald Trump, a popular businessman with no public office experience, was a candidate for the post. This was an election modeled to confuse the public by presenting poll numbers led by flawed surveys. It should have been known that Trump had been preparing for the race for quite some time. At the end of the day, he should have been taken more seriously.
A year of slow economic growth
Since the recession, the most qualified economists in the world have used different weapons to fight market forces and get the economy running again. Central banks brought down rates to near zero levels, and governments tried to find new ways to ramp up spending to create demand and jobs. As a result, we saw brief periods of bull runs. Yet, this was again followed by corrections time and again. Despite many interventions, we witnessed the slowest economic recovery in the post-war era, and this year has provided some guidance for that.
Lately, the world has failed macro-economic assumptions based on which policy makers take decisions.
Generally, to establish any sort of ground rule, it is assumed that certain elements are constant. For example, if we want to predict the outcome of ‘X’, we need to assume ‘Y’ and ‘Z’ to remain constant. If our assumption of ‘Y’ or ‘Z’ does not hold true, it makes the entire model false. One of the major assumptions such as this is ‘rationality of people’.
The failure of Globalisation
The rise in globalisation post 1970 has seen both the developing and the developed world grow exponentially. Easy money flowing from one nation to the other has helped countries develop their infrastructure. Nations take on more debt externally at cheaper rates by being sure that they could make payments from their export revenue. Immigrants are performing jobs which the local population don’t want to do. The lower groups are consequently speeding up the velocity of money through the economy.
However, populism seems to be shifting. Someone has managed to convince either the establishment or the masses that this idea of globalisation has never worked in their favour. The global GDP from 1990-2015 grew at an average rate of 2.8% and the global exports of goods and services as a share of GDP during the same period grew at 1.7%. From 1990-2007, the world grew at an average rate of 3.0% and the exports saw a growth of 2.6%.
Yet, there has been a huge shift in this pattern since 2008. From 2008-2015, global GDP grew at 2.2%, and exports as a share of GDP grew by -0.2% during this period. This is a growing consequence of nationalism, and populism is turning most of the countries inward. Among these are countries like Poland which showed immense promise of turning into a thriving economy.
Poland’s changing political landscape
Poland, historically, has been labelled by civic nationalism which was identified far beyond its borders. It is a form of patriotism which believes in freedom for us and for others. Its State indulged in minimal meddling into the private sector which made doing business in the country easy.
Post 2008, Poland had a competitive advantage compared to its European counterparts due to its cheaper currency, Zloty. Many believed this to be true until the election of the political party that gave a bad name to Polish nationalism. Attracting a voter base on lines of religion and cultural heritage, it united people who found liberal ideas uncomfortable. This sentiment seemed peculiar and started gaining popularity without understanding consequences behind it.
A case of debts and decline in manufacturing
Declining share of manufacturing in the global economy is another driver slowing down the economic recovery. By the end of 1995, manufacturing contributed 21.4% to the global GDP. However, by 2014, this share decreased to 14.7%.
Major economies like US, UK, Japan, and China have seen rampant growth because of manufacturing. They focused on developing their factories from simple goods and evolved into big tech giants. Service sectors like logistics, insurance, medical and financial services were then built around the manufacturing sector, providing further employment and value to the economy.
To understand the current economic conditions more deeply, we need to study more supply side problems. For example, how the decline in working population base creates demand and supply. Or, how the growing external and internal debt levels measure against extravagant spending.
Since 2007, the total debt burden globally has grown from $142 trillion to $269 trillion.
The world has increased its debt burden more during the years following the Global Financial Crises than the years before them. This is majorly contributed by emerging markets and low interest rates that have made it inexorable for governments and the private sector to take on more debt.
While, markets might see some positive news or countries boast about high GDP growth rates on a quarterly basis, some indices will need to be looked at every now and then.