The large economies are set to regain their position in the driving seat, dislodging China from its pole position.
For the first time since the economic crisis began, the US, the UK and the central economies of the European Union are starting to show positive growth and are once again taking their place at the head of the group of countries leading the global economy out of recession.
The fall in oil prices and the slowdown in China have driven this change. Though it is, and might continue to be, characterized by an "extremely unequal" recovery, according to Pedro Videla, head of IESE’s Economics Department.
Professor Videla was joined by Professor Núria Mas at a Continuous Education Session for alumni held in Barcelona this month. Advanced economies are returning to levels recorded before the recession, said Videla. By contrast, countries on the periphery of Europe and Japan are not seeing the same kind of recovery.
The Outlook for Coming Months
Videla outlined a number of changes that could affect the global economy over the coming months relate to the following:
- The end of the commodities cycle. This could have a negative effect on countries that depend on exporting these products. The cycle, which began in 2014, is coming to an end due to the slowdown in China. China currently invests 50 percent of its GDP, mainly in infrastructure and new housing. Rates of investment in the country increased in order to offset the fall in exports at the beginning of the recession, leading to a commodities boom. Given that China accounted for 30 percent of worldwide demand, the cycle is now drawing to a close.
- Contraction in the US. The Federal Reserve is expected to raise interest rates at any time. Up until now, the Fed has said it’s not any hurry to do so, and indeed, the IMF has warned that waiting till next year is the best option. The US is one of the countries that have recovered most quickly from the crisis, but it is yet to reach its full growth potential. Videla believes that when deciding whether or not to raise interest rates, the Fed needs to take into account the forecast increases in GDP, unemployment and house sales.
- A highly probable reversal of capital flows in the emerging economies. Experts believe that countries such as Brazil will see a fall in the flow of investment, due to their failure to make reforms and the stagnancy of their economies. These countries could experience a rapid reversal with highly adverse effects, warned Videla.
The countries that could experience the greatest problems are the oil exporters. They depend on the price of oil price to achieve zero fiscal deficit. To obtain this, Russia needs the price to stabilize at around $100, while Venezuela needs a price of $117.50 and Saudi Arabia $106. Videla suggested that price could settle at around $80, which would have significant consequences for the world economy.
Greece: A European Headache
Growth is not only uneven globally, but also inside of Europe, said Núria Mas.
While France and Germany have now exceeded the GDP levels recorded prior to the crisis, recovery in the countries around the periphery of Europe has been much slower – as we have seen in both Greece and Spain.
Recovery in the Eurozone is threatened by the current uncertainty surrounding the Greek debt, and repayments due in the short term. If Athens fails to meet its debts and make the forthcoming repayment to the ECB, the ECB will not be able to continue accepting Greek bonds as a guarantee for its emergency funding. This could see the country become insolvent and even leave the euro.
Mas believes that the main problem with a potential Greek exit would be the loss of credibility for the European project, which until now has been seen as irreversible.
If one country leaves the euro, she said, we could see a knock-on effect, with others taking the same route as and when they find themselves in difficulties without sufficient support from EU partners.