Outlook 2016: Global Growth Edges Up


8. Emerging market risk: Slowdown, not meltdown

There are big concerns over debt growth in emerging markets:

“While it is normal for debt-to-GDP ratios to rise as financial markets deepen, this post-crisis acceleration of credit growth rightly raises concerns about the burden of this debt on growth. Now that it has become clear that commodity prices will remain ‘lower for longer’, and furthermore that China’s economy will continue to slow due to structural reforms, these concerns have taken on added urgency.

However, countries with floating exchange rates are less vulnerable to those with fixed exchange rates, as a falling exchange rate means they get more domestic currency for exports they sell in dollars – such as has happened in Mexico and Russia. However, countries with fixed exchange rates such as Nigeria and Saudi Arabia face a more troublesome time. Most emerging debt is denominated is local currency, which also helps to protect against big swings in exchange rates.”

9. Market Liquidity: The ‘new normal’ is less

“One of the more perplexing market developments of the post-crisis era has been the palpable loss of liquidity in fixed income markets, especially in less liquid asset classes like corporate credit,” the economists said.

Fixed income assets includes mainly different types of bonds issued by companies and governments. When an asset becomes less liquid, it just means it is more difficult to exchange for cash.

There are a phew reasons why they think this has happened and will persist next year. One is more regulations which increase the cost of transactions. However another is the more trading is being intermediated through agencies, which is a longer prices while credit default swaps – which are essentially insurance against a firm going bust – are less liquid which is making hedging trades against losses more costly.

“It is difficult to see how these market conditions can improve much in 2016. The trends in post-trade visibility and CDS volumes noted above are unlikely to improve, nor is the regulatory treatment of trading books likely to improve. On the contrary, recent evidence suggests that the burdens of balance sheet restrictions imposed by the new regulatory environment continue to mount. Nor do we see any reason to think regulatory remedies are imminent. We therefore do not have much reason to expect market liquidity conditions will improve in 2016.”

10. Corporate earnings: Only a temporary loss of mojo

“The US corporate sector has been on an interesting ride over the pre- and post-crisis era. After rising to all-time highs as a percentage of GDP in the pre-crisis period, corporate earnings plunged during the recession of 2008-2009, only to roar back in the early recovery years 2010-2011. Since then, however, real corporate revenue growth has been unsteady, as has earnings growth,” they said.

Yet outlook 2016 is a positive one. They see a big lift to revenue and earnings next year coming from US and global GDP growth.


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