- Both developed and developing countries experienced growth downgrade in recent weeks. Japan experienced the largest downgrade at -0.5%. The IMF characterizes the growth as fragile. Growth has flat-lined due to subdued global trade, investment and wage growth in advanced economies while emerging countries have been exposed to the slowdown in trade and low commodity prices.
Additionally, capital flows to developing countries fell in 2015 continuing a sustained decline since 2010. The only good thing is that many countries have sounder policies in place such as: more prudent fiscal policies, macro-prudential policies, exchange rate flexibility and more prudent foreign exchange reserve management to help mitigate the effects of the diminished capital flows. - Financial markets have shown increasing volatility as forward-looking prospects are being reassessed. Equity market volatility has gone up from 18% to around 25%. We expect that as uncertainty around growth, central bank stimulus and the direction of interest rates remains volatility will remain high.
- The Syrian crisis was pushed more to the background by the Paris and Brussels bombings. It now however seems as if the population accepts that this problem is here to stay and have returned to going about their daily business. On the economic front it is relatively quiet, though Greece’s economy is again in recession.
As we have argued in the past the Greek drama is not yet over, it now appears that the IMF will pull out of a deal where debt forgiveness is not on the table. The other European states however argue that, for the next couple of years, debt servicing is possible and that this should not now be discussed but when it becomes an issue. Recent events have led to both the IMF and Germany putting water in the wine with debt reduction now clearly on the agenda. - The EU goal to agree Association terms with Ukraine hit a setback as the Dutch voted overwhelmingly against the treaty in a referendum. Whether the Dutch vote will change anything is to be seen.
- We feel the Brexit will hurt both Britain and the EU but will be much worse for Britain with lower foreign inflows and likely significant outflows.
- Whether Turkey should be covered in the Europe section is now even more open to debate as president Erdogan is moving more and more away from core European Union values by consolidating power, curtailing press freedom, cracking down on the Kurds and replacing moderates in his administration. The Syrian refugee crisis has caused the EU to turn to Turkey to stem the flow of immigrants. Turkey is managing to extract a high price among others calling for visa free travel while the country is actually moving further away from EU values. We feel the EU is right in turning to Turkey to help deal with the refugee flow, they can’t be expected to bear the whole financial burden. The problem is the EU has not found the right bargaining chip to keep Turkey from drifting further away…
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