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Wednesday 26.10.2016 | Name days: Kaiva, Amanda, Amanta

SEB: Russia’s economy will continue to decline this year as well

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe global economy has the potential to become stronger. This growth, however, will be unbalanced and brittle. Risks of recession remain dominant in spite of lasting expansive monetary policy and significantly reduced energy prices, notes SEB Bank economist Dainis Gaspuitis.

According to him, the global economy now faces massive and complicated challenges. With the decline of raw materials and rapidly growing debt burden of countries dependent on oil prices, and the currently recession, structural weaknesses of the world’s economies are becoming apparent. China and other oil giants will be forced to sell their assets, which will exact more pressure on global stock markets. In addition to that, the US Federal Reserve System’s corrections and China’s currency policy will exact even more pressure. So far China’s transition to a more flexible currency rate police has not been evident of the country’s desire to become involved in currency exchange wars. The process of normalisation of the currency police will not be an easy one, because it requires a larger degree of cooperation between central banks and other organisations.

China’s GDP growth in 2016 is expected to be 6.5% (6.9% in 2015). It is also expected to decline to 6% in 2017. China will avoid a hard fall thanks to future monetary and fiscal stimulating measures and growing service sector. The slow-down is not structural. It is expected to be cyclic. Industrial sector’s overcapacity, debt burden’s increase and problems with state owned companies make the economy very vulnerable, the expert says.

«Russia and Brazil are showing serious growth problems. Economies of the two countries will continue to decline this year as well. India’s economy is showing the opposite tendency – its GDP will grow up to 8% in 2017. Rapidly growing economies currently form approximately 60% of the GDP, whereas it formed upwards of 80% of the global GDP in previous years. Now these countries are a slowing factor for the global economy, as well as a large asymmetric risk factor, considering political risk elements.»

The European Union’s economy continues to gradually recover. Eurozone benefits from low interest rates, oil price decline and weak euro. Consumption-driven growth was enhanced by low inflation, which helps with households’ purchasing power in conditions of reducing unemployment. Experts also expect a very cautious growth of capital expenditure. According to outlooks, Eurozone’s GDP is expected to be 1.9% this year (1.5% in 2015) and 2% in 2017. The impact of the migrant crisis on economy is not significant. Nevertheless, there are risks of uncertainty in regards to long-term impact on economy. The European Union has many challenges ahead, especially considering the risk of UK exiting the union.

«Economy in USA has been impacted by international events in spite of positive tendencies in the country itself. The end of 2015 was largely unimpressive. USA’s GDP growth for 2016 is expected to be similar to last year’s – 2.4%. Next year’s economic growth may reach 2.7%. Powers non-beneficial to inflation continue dominating the global market – overproduction, pressure on wages and globalisation and digitisation processes. For most countries inflation growth has been slowed because of the drop of oil prices. Growing production pressure will help reduce the risk of deflation. Unemployment is low in USA to point of kickback appearing in wage changes, especially in 2017. Looking at the future, it is possible inflation will grow. Nevertheless, it is expected to be below most countries’ acceptable threshold,» – explains Gaspuitis.

«Global monetary policy will become even more expansive this year. Weak risk appetite on financial markets seemingly provokes new stimulating measures. Although the US Central Bank continues to raise interest rates, the normalisation process is delayed by the fact that the rest of the world is headed in the opposite direction. Extremely low inflation expectations and negative growth risks force the European Central Bank and the Central Bank of Japan to reduce base rates and expand asset procurements. Considering the risk that actual interest rates have a tendency of growing under influence of dropping inflation, many central banks will find it difficult to conclude their stimulating efforts. Everything points to the growth of future rates being cautious. The long low inflation period will have forced central banks to reassess their monetary policy goals. It is possible that central banks will be forced to admit that more time will be necessary than two years to achieve the established inflation goals,» – said the economist.


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