Last updated: 22:38 / Tuesday, 2 February 2016
Says Guy Wagner

The Global Economy’s Moderate Growth is Becoming Increasingly Fragile

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The Global Economy’s Moderate Growth is Becoming Increasingly Fragile
  • Inflation is staying low due to the ongoing slump in oil prices
  • First federal funds rate hike for nearly ten years – asset purchase programme in Europe extended
  • Equities could see a difficult year in 2016
  • The euro's recent rebound unlikely to be sustained

The global economy’s moderate growth is becoming increasingly fragile, largely due to the weakness of investments in the energy sector and slower growth in the Chinese economy. This is the view of Guy Wagner, Chief Investment Officer at Banque de Luxembourg, and his team, published in their monthly analysis, ‘Highlights.’

In the United States, there are mounting signs of industrial activity slackening due to the strength of the dollar and the weakness of investments in the energy sector. The increase in household purchasing power – fuelled by falling oil prices and the recent uptick in wages – is nonetheless keeping the US economy on a path to growth. In Europe, economic statistics are pointing in the right direction, although the pace of growth in absolute terms remains subdued. Japan’s economy is continuing to stagnate while economic growth is slowing in China. "The global economy’s ‘moderate growth’ is becoming increasingly fragile," observes Guy Wagner.

Inflation is staying low due to the ongoing slump in oil prices. In the United States, inflation edged up from 0.2% in October to 0.5% in November. The Federal Reserve’s favourite indicator, the PCE (personal consumption expenditures) deflator, excluding energy and food, remained unchanged at 1.3%. In the eurozone, the inflation rate held steady in December. Core inflation, excluding energy and food, which Mario Draghi, President of the European Central Bank (ECB), recently said was a more representative measure of the cost of living, was unchanged at 0.9%. "While oil prices remain depressed, the ECB’s target inflation rate of 2% hardly seems realistic," says the Luxembourg economist.

As expected, after seven years of a near-zero interest rate policy, the US Federal Reserve raised its key interest rate by 25 basis points. This was the first federal funds rate hike for nearly ten years. The monetary authorities have confirmed that any subsequent increases will be implemented slowly and gradually. In Europe, the ECB expanded the quantitative easing programme by extending the asset-purchase period from September 2016 to March 2017, by including regional and local government debt in the programme, and by further cutting its deposit rate. “If the inflation target is still not met, it is likely that additional QE (quantitative easing) measures will be introduced."

Contrary to year-end tradition, equity markets performed poorly in December. Plummeting oil prices to below 40 dollars a barrel had a knock-on effect on equity markets out of a concern that the economic slowdown might worsen and that the financing capacity of lower-rated companies could suffer. According to Guy Wagner: "After a more volatile and less successful second half in 2015 and despite the lack of alternative investments, equities could suffer a difficult year in 2016 due to the slowdown in economic conditions, the sharp increase in share prices since 2009 and global geopolitical tensions."

In December, the euro gained 3% against the dollar, with the euro/dollar exchange rate climbing from 1.06 to 1.09. The single currency’s rebound was prompted by investors’ disappointment over the scale of the ECB’s additional QE measures. Guy Wagner concludes: "If American and European monetary policies continue to diverge, the euro’s recent rebound is likely to be short-lived."

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