“There are growing fears about the health of the global economy”, headlines BBC News at Ten

21 Aug 2015, by Geoff Tily in Economics

Yesterday (20 August) Robert Peston’s report on the growing crisis in emerging market economies was given top billing on the BBC News at Ten (you might still be able to catch it here). Motivated mainly by the slowdown in China, and covering an array of stock market, exchange rate and other economic statistics for emerging markets, he examined the consequent threat to global economy. I doubt whether causality is so obviously one way, but his piece is surely of much importance.

The Financial Times (today, ‘Bruising session for stocks amid EM turmoil and China sell-off’, by Dave Shellock) reports a ‘bruising session’ in yesterday’s financial markets, that continued a run of falls on the main world stock markets. In the UK “The FTSE 100 fell for an eighth successive session, its longest run of losses since 2011, and closed at a seven-month low”. So far, the sell-off is continuing today.

Stock market declines come alongside renewed falls in commodity markets. Oil has fallen heavily since the middle of last year (at the end of June, so pretty much exactly the middle), and declines have now resumed following a pause over the start of this year from January to May. This Wednesday, Brent crude was at a six-year low.

On commodities, we seem to be in similar territory: for example, the FT report copper “falling below the $5,000 a tonne mark this week to a six-year low” (though recovering a little yesterday). The S&P GSCI (Standard and Poor Goldman Sachs Commodity Index), a market benchmark measure, shows commodity prices again at a six-year low and only a little above the trough in the financial crisis of 2008. (I don’t think I can show you the chart, but there’s a great facility to look at it here).

As producers of raw materials and commodities, many emerging markets can be buffeted by movements in these prices on international markets. So Russia for example is in recession, with quarterly GDP growth negative from the second half of 2014 through to and including 2015Q1, exactly coinciding with commodity markets. Brazil had negative GDP growth in 2015Q1. China do not seem to report quarterly GDP figures in the same way as everybody else: all we know is that four quarter growth was running at 7.1 per cent in 2015Q1, which is not out of line with growth rates between 7 and 8 per cent since 2012. Causing the alarm instead in the case of China has been the severe market turmoil and the recent exchange devaluation, about which there has been extensive commentary. Today a ‘Markit’ measure seems to be the focus of attention, as reported by CNBC:

… the flash Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) dropped to 47.1 in August, marking a six-and-a-half-year low. The reading beat a Reuters poll of 47.7, but was lower than July’s final reading of 47.8.

There is an mini-industry of commentators discussing why China’s expansion may come to an end (e.g. prolonged over-investment and excessive indebtedness), but it doesn’t seem so obvious in the data available now that the real economy is poised to collapse, and that it is the sole source of global turmoil.

More generally, as discussed here before, western economies appear to be faltering. In their June 2015 Economic Outlook (after 2015Q1 GDP figures) the OECD reported that globally Q1 was the weakest quarter since the financial crisis, and while it had been attributed “mainly to a confluence of special factors, [it] may in reality be signalling some persistent underlying weakness”. Quarter two figures are unlikely to put their minds at rest. The chart below shows the US hardly back in rude health; Japanese growth negative; and already weak growth in the eurozone a little weaker (a table at the end of this post reproduces latest OECD information on all member economies).

GDP quarterly growth, per cent

(NB the negative 2014Q2 figure for Japan at -1.9% has been cut off for clarity)

Back on News at Ten, Robert Peston interviewed Adair Turner, previously head of the Financial Services Authority and before that Vice-Chairman of Merrill Lynch Europe (an investment bank).

Peston: How bad could it get? Turner: I don’t think we are close to a financial crisis remotely like 2008. We have unresolved problems in the balance of the global economy – the real economy – and its over-reliance on debt which were there in 2008 and they’re there in some sense even worse today.

It is hard to see why a problem of over-indebtedness can be so sharply separated from the position of financial sector, but, either way, indebtedness is a global problem. My own suspicion is that another factor of great relevance is the withdrawal of Federal Reserve’s QE3 programme, with the withdrawal at around its half-way point when commodity markets began to cave in. Even in spite of the ECB taking up the slack , I find the lack of discussion of this feature highly peculiar (see here). With fiscal policy globally still on a broadly contractionary setting, and deflationary pressures not going away, there is very little supporting global demand. Moreover talk in the UK and US of interest rate rises – and hence the prospect of even further reduced demand – still persists, though surely such action is more and more unlikely as every day goes by. The economic problems of the world seem very far from resolved.

Annex: Latest OECD figures for GDP quarterly growth

Q1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Q2-2015 Australia 1.0 0.6 0.3 0.5 0.9 Austria 0.3 -0.3 0.0 -0.2 0.7 0.1 Belgium 0.4 0.1 0.3 0.2 0.4 0.4 Canada 0.3 0.9 0.8 0.6 -0.1 Chile 0.9 -0.2 0.4 0.8 1.0 Czech Republic -0.1 0.5 0.5 0.5 2.5 Denmark 0.2 0.2 0.6 0.3 0.5 Estonia 0.6 0.8 0.2 1.0 -0.3 Finland -0.5 0.3 -0.1 -0.2 -0.2 France -0.2 -0.1 0.2 0.1 0.7 0.0 Germany 0.7 -0.1 0.2 0.6 0.3 0.4 Greece 0.9 -0.1 0.8 -0.2 0.0 0.8 Hungary 0.7 1.0 0.6 0.8 0.8 0.4 Iceland -1.9 -0.6 4.2 0.2 -1.5 Ireland 2.3 1.2 0.4 0.2 Israel 0.4 0.8 0.1 1.5 0.5 0.1 Italy -0.2 -0.2 -0.1 0.0 0.3 0.2 Japan 1.1 -1.9 -0.3 0.3 1.1 -0.4 Korea 1.1 0.5 0.8 0.3 0.8 0.3 Luxembourg 4.1 -0.2 2.2 2.2 0.7 Mexico 0.5 0.9 0.5 0.7 0.4 Netherlands -0.4 0.6 0.4 0.9 0.6 0.1 New Zealand 1.4 0.2 1.4 1.2 0.1 Norway 0.6 1.0 0.4 0.9 0.2 Poland 1.0 0.7 0.9 0.8 1.0 Portugal -0.5 0.5 0.2 0.4 0.4 Slovak Republic 0.5 0.6 0.7 0.7 0.8 0.8 Slovenia -0.1 1.1 0.7 0.3 0.8 Spain 0.3 0.5 0.5 0.7 0.9 1.0 Sweden 0.4 0.6 0.6 0.9 0.4 1.0 Switzerland 0.5 0.2 0.6 0.5 -0.2 Turkey 1.3 0.0 0.4 0.8 1.3 United Kingdom 0.9 0.9 0.7 0.8 0.4 0.7 United States -0.2 1.1 1.1 0.5 0.2 0.6 Euro area 0.2 0.1 0.2 0.4 0.4 0.3 European Union 0.4 0.3 0.3 0.4 0.4 0.4 G7 0.2 0.4 0.6 0.5 0.4 NAFTA -0.1 1.1 1.0 0.5 0.2 OECD – Europe 0.4 0.3 0.4 0.5 0.6 G20 0.7 0.8 0.9 0.8 0.6 OECD – Total 0.3 0.4 0.6 0.5 0.5 Non-OECD Member Economies Argentina -0.5 0.8 -0.1 0.3 0.2 Brazil 0.7 -1.4 0.2 0.3 -0.2 Colombia 1.5 0.3 1.1 0.6 0.8 Costa Rica 0.7 1.2 0.7 0.3 0.4 India 1.6 1.7 2.2 1.4 2.1 Indonesia 1.2 1.2 1.2 1.2 1.1 Latvia 0.4 0.7 0.4 0.5 0.3 Lithuania 0.5 0.8 0.5 0.7 -0.5 Russia 0.1 0.3 -0.3 -0.6 -1.3 South Africa -0.4 0.1 0.5 1.0 0.3