Global economic challenges

When bad politico-economic events happen, they cause huge financial market swings. Till recently, the global economy was in the midst of absorbing these events, however the falling prices of commodities, weaker capital flows and subdued global trade reduced the global rate of growth. These trends of deceleration in the emerging and developing economies are still continuing. And the existing politico-economic conditions require stabilisation of commodity prices, balancing of the financial markets and the improvement in the Chinese economy.

The growth of global economy otherwise can be undermined by the factors like emerging risks and uncertainty which cause turmoil in the world’s financial markets. Why such turmoils happen? The fact is that these uncertainties emerge from sudden shifts in barrowing cost, heightened geopolitical tensions and lingering vulnerabilities.

The recent development of Brexit also did accentuate and support the negative global forces building up for years; these forces are now directing the vicious cycle of political uncertainty and are causing harmful trends on the global economy. Unfortunately, the emerging economic externalities have not been removed by the political forces in the affected economies as they were unable to limit the impact of the negative sentiments.

The global economic conditions have further deteriorated due to recent political and economic events. This emerging turmoil is accelerating due to unleashed powerful negative forces. The interacting forces on global economy include low inflation, strong dollar, weaker monetary policy, low interest rates, slow growth and political instability. Let us examine how these forces are affecting the global economies:

Oil glut The easy availability of oil and other commodities in the market is causing a glut of labour thereby leading to high levels of unemployment throughout the world despite the fact that inflation has been low (below the 2% mark).1

The pace of emergence of these forces is very fast. It is evident from the low prices of oil and bonds. The resultant easy availability of commodities is discouraging spending and investments by making the debt more oppressive. The US bond market is showing persistence low inflation (may be at the level of 1.34 per cent) and in the global markets there appears to be a general trend of low inflation.2

Rising dollar The dollar has gained 25% against the major currencies in the last 2 years; the trend is continuing, that is why the Fed is not increasing the interest rate. It also shows that economies of major countries will remain weak in the near future. Resultantly the markets will be heavily reliant on the US economy.

The MNCs and big businesses around the globe maintain their debt in US dollar, a strong dollar will make their debt to rise and making the maintenance of the competitive edge more difficult and the trend may create spill-over of economic weaknesses.

American exports may be undermined by the strong dollar, thereby decreasing the growth rate in US. The recent referendum in Britain has given strengths to the emerging chaos.3

Ineffective monetary policy The hitherto debated forces are effectively affecting the directions of global economic system, that is why many central banks are interfering too quickly to reduce the impact of uncertainty and negativity. It is evident that the EU and Japanese central banks are in the midst of pumping money into their financial systems in order to reduce the impact of negative symptoms being shown by investors. The Fed and the Bank of England too for these reasons are delaying the increase in the interest rate.

The future trends of the global economic policies are going to be determined by the emerging direction, that’s why the developed economies have to prepare themselves to face the confronting challenges. It looks the interest rates will either remain static or low in the near future.

Low interest rates At the moment, yield from the treasury bonds stands at 2.3 per cent and there appears to be a declining trend. The longer term rates are constantly falling. The interest rate in several EU countries is also low, obviously if someone buys bonds at this moment and keeps them for a specific time, he will lose the money. That is why we are losing investors as the expectations of investors stand doomed.4

Slow growth All the major economies are slowing, and there is obviously slow growth in Japan. However, limited growth has been registered in a few European countries. The reasons for this slowdown amongst other include defective economic policies, falling productivity and negative political sentiments. Prospects for global economy are now looking bleak. In the coming days, the trend of slow growth is emerging everywhere. Furthermore, the uncertainty caused by Brexit will also affect the productivity and growth of the EU.

Political instability At the moment right wing nationalists are attracting the voters in continental Europe, Britain and the United States. The current political environment is becoming toxic leading to polarisation by attracting immature politicians from outside the mainstream. This widening of political spectrum will lead to uncertainty and negativity, and it all may lead to a negative growth in the global economy and financial markets.

An inter-related cause and effect spectrum appears to be emerging as is evident from the recent Brexit vote. This vote has fuelled negative thinking in the voters mind, thereby making the future of global economic outlook bleaker.

(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi)

1. This low inflation is going to persist for some time.

2. This trend will slow down the growth.

3. Resultantly, the US dollar in the market has further climbed up.

4. However, a fear of premium may force them to invest into bonds even if they lose money.