Download Monthly Economic Commentary: Global growth downgraded

Monthly Economic Commentary: Global growth downgraded
April 2016
Global Trends
Global economic growth forecast for 2016 is downgraded to 3.2% by the
IMF. This is 0.2 percentage points lower than the IMF’s forecast in January, and
suggests that growth this year will be virtually the same as in 2015. It is the
second time this year that the IMF has downgraded its 2016 forecast. The IMF
cites the slowdown and rebalancing in China; a further decline in commodity
prices, especially for oil, affecting commodity producing countries; a related
slowdown in global investment and trade; and declining capital flows to
emerging market and developing economies as factors weighing down on the
global outlook. In addition, the IMF highlights a number of noneconomic factors
(such as geopolitical conflicts, political discord, terrorism and refugee flows) that
are affecting confidence. The recovery is projected to strengthen in 2017.
IMF GDP Growth Forecasts (%)
2015
Global
3.1
United States
2.4
Euro Area
1.6
China
6.9
Japan
0.5
United Kingdom
2.2
2016
3.2
2.4
1.5
6.5
0.5
1.9
2017
3.5
2.5
1.6
6.2
-0.1
2.2
Source: IMF World Economic Outlook, April 2016
International trade is forecast to grow by just 2.8% this year. The World
Trade Organisation (WTO) expects the volume of international trade to be the
same as in 2015, the fifth consecutive year of trade growth below 3%, and
below the average of 5.0% since 1990. Weakness in emerging market imports
has been a key factor in holding back world trade growth over the last year.
Downside risks to the forecast include increasing financial market volatility and
a sharper than expected slowdown in the Chinese economy, although the WTO
highlights that trade levels could increase if the European Central Bank
succeeds in generating faster growth in the euro area.
Minutes of the US Federal Reserve's March meeting re-ignited concerns
about global growth, resulting in stock market falls and sliding oil prices. Fed
members feared a slowdown could make it difficult to achieve employment and
inflation targets, so left interest rates unchanged. Economic data for the US (the
world’s largest economy) are fairly muted. The economy is still creating jobs
(employment increased by 215,000 in March), but the unemployment rate rose
unexpectedly to 5% from 4.9% the previous month. Business survey data for
March show growth remained subdued in manufacturing, although new export
orders stabilised following a slight fall in February. Service sector output also
increased after a slight decline the previous month. Generally, domestic activity
is upbeat, although restrained by weak global growth and a strong dollar
affecting exports. The US is one of Scotland’s main export markets and the
strong dollar and relative weakness of sterling will make our exports more
competitive.
China’s economy (the world’s second largest) grew by 6.7% (annualised)
in the first quarter of the year, its slowest rate since 2009, but above the
government’s 6.5% target. Imports fell by 14.2% in 2015 according to figures
from the WTO, contributing to low growth in the volume of world trade. Trade
figures for March show exports beat expectations (up 18.7% on the same
period last year) but imports declined by 1.7% compared to last year. Latest
business survey results show that activity in the manufacturing sector expanded
in March for the first time in nine months. Over the quarter, however, the index
was the lowest recorded since early 2013.
In Japan, manufacturing activity contracted at the fastest pace in more
than three years in March. Business survey results show that new export
orders shrank sharply, adding to fears the world’s third-largest economy is
sliding back into recession. Despite the introduction of negative interest rates by
the central bank to boost lending and investment and to keep the value of yen
low to boost exports, the currency has surged, due to the yen’s traditional
position as a safe haven when there are concerns about the global economy.
Japan is the world’s only advanced economy that the IMF is forecasting will
shrink in 2017, mainly as a consequence of the impact of a planned
consumption tax increase
The strength of domestic spending in the eurozone is driving demand for
imports. This is good news as the zone is Scotland’s biggest overseas market.
Business survey results show the rate of expansion improved for the first time in
three months in March. The growth rate was higher in manufacturing, despite
new export growth slowing to a 14-month low, than in services so it is likely the
bloc’s economy will have continued slow growth in the first quarter of 2016
given the dominance of services in GDP.
Monthly Economic Commentary: Global growth downgraded
April 2016
UK Trends
Growth in the UK economy may have slowed further in the first quarter of
2016. The Index of Production is one of the earliest indicators of growth, and
both production and manufacturing (the main component of production) indices
have been generally declining since October 2015.
The British Chambers of Commerce expect slower economic growth in
Q1. Results from their Quarterly Economic Survey, showed that most key
survey indicators (such as sales, orders, business confidence and investment
intentions) were either static or decreasing over the first three months of the
year. Overall, the figures for both services and manufacturing indicate
continued growth, but domestic sales and orders reached their lowest level for
over three years in the service sector and domestic sales declined again in
manufacturing. Confidence in turnover and profitability is still historically low in
both sectors.
The Purchasing Manager Index (PMI) business survey tells a similar story.
Growth in manufacturing remained subdued in March (unchanged from
February’s seven-month low). Output of consumer products increased following
a decline in February, but investment goods output continued to slow and levels
of export business fell for the third consecutive month due to softer global
demand. Overall, Q1 registered one of its weakest manufacturing growth
performances over the past three years. In services, output growth was the
weakest since Q1 2013, although activity increased at a faster rate in March
than the previous month. The surveys suggest growth of 0.4% for the UK
economy as a whole in Q1, lower than the 0.6% achieved in Q4 2015.
Consumer prices inflation (CPI) reached 0.5% in the 12 months to March,
up from 0.3% in February, a bigger increase than analysts had expected. The
jump was mainly due to rises in air fares, influenced by an early Easter, and
clothing and footwear prices. Although the increase strengthened the value of
sterling, CPI is still well below the Bank of England 2% inflation target, making
interest rates rises unlikely this year.
Productivity performance in the UK has been poor since the recession and
the latest statistics show the worst decline in output per hour since the financial
crisis. The Office for National Statistics estimates productivity is currently 14%
below pre-crisis trends after falling by 1.2% between the third and fourth
quarters of 2015. Output increased by only 0.6% while hours worked increased
by 1.7%. There was some improvement in service sector productivity, which
increased by 1.1% over the quarter; however, it declined by 3.4% in
manufacturing.
The UK employment rate for the three months to January was 74.1%, the
joint highest since comparable records began in 1971. 479,000 more people
had jobs than the same period last year: nearly two thirds of these were fulltime. The number of unemployed people fell over the quarter leading to an
unemployment rate of 5.1%.
Scottish Trends
The Scottish economy grew by 0.2% during the final quarter of 2015
(compared to growth of 0.6% in the UK). The service sector grew by 0.3%,
production fell by 0.1% (driven by declines in mining, quarrying and utilities),
and the construction sector grew by 0.1%. GDP growth for 2015 was +1.9%,
lower than the UK rate of +2.3%. Scottish growth almost stalled in the second
and fourth quarters of 2015, and was negative in the third quarter.
More recent business survey data suggest the Scottish economy slowed
further during the first quarter of 2016. The latest Bank of Scotland PMI
survey reported deteriorating business conditions in Scotland’s private sector in
March as the headline activity figure fell into negative territory. The volume of
new business fell for the second successive month, driven by the sustained
downturn in the oil & gas industry. Manufacturing fared worse than services,
where the decline in business activity was more muted.
The Royal Bank of Scotland Business Monitor also reported slowing
growth in the first quarter of this year. In the three months ending February
2016, sales, business activity, new business volumes and investment all
weakened. According to the research, firms across Scotland are reporting
falling exports: only one in six reported an increase in export activity. The main
cause of slowing growth seems to be the weakening oil price since businesses
surveyed in the North East reported weaker performance. More positively, firms
expect a rebound in growth in the next six months.
Monthly Economic Commentary: Global growth downgraded
Business conditions are still subdued with little change from 2015
according to Scottish Engineering’s Quarterly Review for Q1 2016. Order
intakes and output volumes are still negative (i.e. more firms are reporting a
decline than are reporting an increase) and optimism throughout the industry is
still not improving.
Economic indicators from the Scottish Chamber of Commerce quarterly
report show business performance varied by sector in the first quarter of
2016. Construction performed strongly for new contracts, sales revenue and
profitability, and expectations for the future are positive; while manufacturing
declined, but expects to recover over the next few months. Financial & business
services has been performing poorly since the second quarter of last year, but
oil and gas businesses within the financial & business services sector are
continuing to report weak performance while non-oil and gas businesses are
reporting positive trends.
Scottish export volumes fell 1.5% during the fourth quarter of 2015. The
biggest contributions to the decline were Food & Drink (-4.9%) and Engineering
(-1.8%) - which together account for almost 62% of international manufactured
exports from Scotland. On an annual basis (comparing the most recent four
quarters to the previous four) exports grew by 0.6%. Manufactured export
volumes are now around 3.0% below their pre-recession peak in 2007, although
17% above their trough in 2009.
The number of people in employment in Scotland went up by 17,000 in the
three months to January. Over the quarter the employment rate increased by
0.1 percentage points to 74.5% (compared to 74.1% in the UK). The number of
people out of work, however, also rose (+16,000) pushing the unemployment
rate up by 0.5 percentage points to 6.1% (compared to a UK rate of 5.1%).
Youth unemployment went up by 5,000 compared to the same period last year
and the youth unemployment rate increased by 0.4 percentage points to 15.7%
(compared to a 2.4 percentage point fall to 13.7% in the UK).
April 2016
Summary of Headline Indicators
Indicator
Scotland
Change
on year
UK
GDP growth (Q4
2015)
0.9%
2.1%
Manufactured Export
growth (Q4 2015)
0.6%
5.2%
Employment rate
(Nov – Jan 2016)
74.5%
74.1%
Unemployment rate
(Nov – Jan 2016)
6.1%
5.1%
Change
on year
Performance of SE Account Managed Companies
Scottish Enterprise regularly seeks feedback from account managed companies
on business performance and surveyed 360 companies between January and
March 2016. Feedback was generally positive with the majority of companies
reporting increases in turnover, profitability, employment and exports over the
previous six months. Almost 60% of companies reported an increase in
turnover, and 50% of exporting firms reported an increase in overseas sales.
Monthly Economic Commentary: Global growth downgraded
April 2016
and unemployment higher in Scotland, despite a slightly higher employment
rate.
The Scottish economy faces a number of headwinds, especially the negative
effects from the ongoing low oil prices and knock-on effects on employment and
investment in the oil & gas sector and its supply chain, and a weaker outlook for
exporters with slowing global growth and an increase in economic uncertainty.
Ongoing trading conditions will, therefore, remain challenging for Scottish
businesses. Improving competitiveness, particularly through increased
productivity levels, will be a key factor for Scottish firms to compete at home
and overseas through a focus on innovation, investment, entering new markets
and developing higher workforce skills.
Looking ahead to the next six months companies are optimistic. Around three
quarters of firms expect to increase turnover and profitability.
Strategy & Sectors
April 2016
_______________________________________________________
This commentary reflects our understanding of issues at the time of writing and
should not be taken as Scottish Enterprise policy. If you have any comments or
suggestions for improvement, please email Jennifer Turnbull
([email protected]) or phone 01786 452010.
Implications for Scottish Enterprise
The latest data show that growth in the Scottish economy weakened in 2015
and could continue to slow in 2016. The slowdown in Scotland is consistent with
the UK as a whole but seems to be more pronounced as GDP growth is slower