Global Economy to Collapse in 2016?
Are fears of a global economic collapse too gloomy? Not if you’ve been paying attention to all of the economic data that has been coming out over the last number of years. Sure, perma-bulls have been finding misguided solace in rising stock market valuations, but the mirage of global growth is starting to melt into thin air.
Investors can only ignore real economic data for so long. After all, stocks are only as strong as the economies that support them. And stock markets are only as strong as the stocks that go into making them up.
The blunt truth is that the global economy is teetering on a collapse. The combined forces of the U.S., Russia, the eurozone, China, Japan, and emerging market economies entering a recession will drag global growth significantly.
A global recession does not mean negative growth. According to the International Monetary Fund (IMF), a global recession is defined as a decline in growth to two percent as economic indicators lag.
According to the IMF, global gross domestic product (GDP) growth for 2015 is forecast at 3.1% and 3.6% for 2016. In 2014, GDP growth was 3.4%. But those estimates are pretty frothy, especially when you consider how often those forecasts get revised downward. (Source: Uncertainty, Complex Forces Weigh on Global Growth, IMF.com, October 6, 2015.)
A 2016 Global Recession Made in China?
The global economy is grinding down. And Asia’s largest economy is leading the way. Chances are good that the Chinese economy will experience a hard landing in 2016, acting as a millstone around the neck of the global economy.
That’s because, if China enters recession (with Russia and Brazil already in one), other weakened emerging economies will follow suit, dragged under by weak demand for Chinese exports.
Emerging economies account for between 40% and 60% of world GDP. They have also been hit hard by the slump in commodity prices. On top of that, for many emerging economies, China is their largest trading partner.
The IMF recently cut its forecast for emerging markets to four percent this year, down 0.2% from its July update. This marks the fifth consecutive year of declining growth and a level roughly half the rate the IMF announced six years ago.
In August, Barclay’s lowered its expectations for Chinese growth in 2015 from 6.5% to 6.6%. Then they lowered it even further for 2016 from 6.6% to six percent.
China is a little more optimistic about its economic outlook and expects to reach its growth target of seven percent in 2015. Government leaders are forecasting 2016 growth of between 6.5% and seven percent. While this sounds pretty decent when compared to the U.S. economy, this still represents the worst performance in more than 20 years.
Naturally the country will continue to push ahead with economic reforms. But as we’ve seen, they don’t really work. The country has slashed interest rates five times since last November (to 4.85%), devalued the yuan, and tried to prop up its stock market.
All to no avail.
The country’s manufacturing sector is looking increasingly weak. For example, the Caixin Flash China General Manufacturing Purchasing Managers’ Index (PMI), a key indicator of the Chinese manufacturing sector, dropped to a 78-month low in September. (Source: Caixin Flash China General Manufacturing PMI, Markit Economics, September 23, 2015.)
The index currently sits at 47.0, down from 47.3 in August. Any value below 50 on the PMI suggests contraction in the manufacturing sector. The overall softness in the Chinese economy points to a slumping global economy.
At the same time, the signs of China’s effect on the global meltdown can be felt everywhere, from the decline in GDP growth among emerging economies to low commodity prices to the downturn in global trade to inflation.
With interest rates already at ultra-low levels, there’s nothing left for central banks around the world to manipulate. This time, the global economy is going to be left to its own devices. Central banks will certainly try and implement some sort of monetary policy to kick-start the economy, but it will be too late.
China has led the way to higher debt followed closely by other emerging economies including Turkey, Chile, and Brazil, all of which will be vulnerable should the Federal Reserve ignore warnings and raise interest rates.
Eurozone Economy is Sickly
The eurozone is the largest economic region. And its economy is also in jeopardy. The IMF recently trimmed its growth outlook for the 19-nation eurozone to just 1.5% this year and 1.6% in 2016.
During the first quarter, the eurozone economy grew at a glacial 0.5% and 0.4% in the second quarter. To help kick-start the economy, the European Central Bank (ECB), which has set an inflation target of just under two percent, launched a trillion euro stimulus program to support the sagging eurozone economy. (Source: ECB Starts Buying German, Italian Government Bonds Under QE Plan, Bloomberg.com, March 9, 2015.)
The ECB began purchasing sovereign debt in March and will continue to purchase until the end of September 2016. But the ECB could follow the unwise path of the Federal Reserve and initiate another round of bond-buying if the eurozone economy doesn’t take off. Maybe it will even be open-ended.
Specifically, the IMF said that Germany, the largest economy in the region, will continue to drive so-called growth, expanding at 1.5% in 2015 and 1.6% in 2016. France, the second-largest economy will grow at 1.2% this year and 1.5% in 2016 and Italy, the third-largest economy in the eurozone, will grow at 0.9% in 2015 and, apparently, hit 1.6% in 2016.
A lot has changed in the eurozone since the markets bottomed in 2009, and not all for good. Case in point: by 2016, China’s economy will be 87% bigger than it was in 2009. Meanwhile, in the eurozone, the Spanish, Portuguese, Finnish, Italian, and Greek economies will all be smaller than they were in 2009. (Source: Europe is the sick man of the globe: Britain will thrive away from its enfeebling grip, cityam.com, September 29, 2015.)
Further, unemployment in the eurozone is persistently high and is more than double that of the U.K. and U.S., with endemic rates in Greece, Italy, and Spain. The eurozone was supposed to bring member economies together, but it has had the opposite effect.
Disharmony, weak GDP growth, and high unemployment are the earmarks for an economy teetering on the edge.
U.S. Recession 2016
No country is an economic island. The U.S. is finding this out more and more. It’s hard to argue that the U.S. economy is in growth mode when S&P 500 economies are experiencing back-to-back quarterly declines in earnings and revenue.
The Dow Jones Industrial Average, which is made up of the 30 largest American companies, is down 5.7%. The S&P 500 is down more than four percent. As a leading economic indicator, the stock market is saying trouble lies ahead, Especially when you consider that roughly 50% of S&P 500-listed companies get more of their revenue from outside the U.S. And the number is rising each year.
The effects of the weakening global economy are being felt on Wall Street. Companies have lowered the bar for earnings in the third quarter. Earnings growth for the third quarter of 2015 is estimated to decline 5.1%. That’s much higher than the forecasted decline of just one percent at the start of the third quarter. If the index reports a decline in earnings in the third quarter, it will mark the first set of back-to-back quarters of earnings declines since 2009. (Source: Factset Key Metrics, Factset.com, October 2, 2015.)
During the past year (four quarters), the average decline in the bottom-up EPS estimate during a quarter has been 5.3%, which is lower than the one-year average, the five-year average, and the 10-year average for a quarter.
Nine sectors (out of 10) have lowered their growth rates due to downward revisions to earnings, led by the Materials sector. Of the 108 companies that have issued guidance for the third quarter, 76 (70%) have issued negative EPS guidance while 32 companies have issued positive EPS guidance.
As for revenues, third-quarter sales are projected to fall 3.4%. This is also higher than the estimated year-over-year revenue decline of 2.5% at the beginning of the quarter. If the index reports a decline in earnings, it will be the first time it has recorded three consecutive quarters of year-over-year revenue declines since the first quarter of 2009 through the third quarter of 2009.
The estimated sales decline for the third quarter of 2015 is 3.4%, which is also higher than the estimated year-over-year revenue decline of 2.5% at the start of the quarter. Looking at future quarters, analysts do not project earnings growth to return until the fourth quarter of 2015 and revenue growth to return until the first quarter of 2016.
But again, all things considered, that seems a little optimistic.
Are We Headed for a Global Economic Collapse in 2016?
Central banks have been trying to prop up the global economy for years. And as long as they pump enough money into the economy, they can keep the illusion alive. But if you don’t actually fix the problem, you’re just throwing good money to cover up a deficit. Eventually you either run out of money or the economy woes gets too big to fix.
That’s what’s happening in China, the eurozone, Japan, and many emerging economies. The global economy is a mess.
Here at home, the Federal Reserve sent trillions of dollars flooding into the U.S. economy to no avail. The economy still stinks, debt levels remain high, underemployment is high, wages haven’t really moved, 45.5 million Americans receive food stamps (in 2008, before the Great Recession and so-called recovery 28.2 million Americans received food stamps), and, not surprisingly, more and more Americans are getting discouraged.
Eventually interest rates will rise. According to the IMF, this could spark a new financial crisis. Especially in emerging markets which are anchored to American borrowing rates. Rising interest rates could usher in a new credit crunch as global corporations are pushed to the limit to meet their debt obligations. This will put pressure on already-stressed economic activity around the world.
Regional and country-specific recessions may be a normal part of the economic cycle, but a global recession is not. And there really aren’t any catalysts out there to spark the global economy into a period of prolonged, expansion.
The global economy is weak and getting weaker. And there is an excellent chance we will experience a global recession in 2016.