“Nothing changes on New Year’s Day,” the U2 song says, and this certainly has been the case in financial markets during the first week of 2016.
Old worries about the slowdown in the Chinese economy and sluggishness of global growth, weighed heavily on risk appetite.
World stock markets suffered heavy losses, with chaotic and truncated trading on Chinese equity markets which fell by 10% in the week.
The negative sentiment spilled over into commodity markets, with oil prices continuing to fall, reaching 12-year lows at below $33 a barrel.
These developments have reinforced the market’s view that monetary policy will remain very accommodative everywhere.
Further policy loosening would seem likely in China, with continuing QE in the eurozone and Japan, while the BoE is expected to keep rates on hold this year.
The markets remain firmly of the view that the Fed will not be able to deliver on its projected rate hike path of 25bps per quarter in 2016.
Thus, bond markets remain well underpinned, with yields moving lower in the first week of the New Year as the “risk-off” tone dominated.
The bottom line for markets is that global growth is likely to remain sub-par again this year.
The IMF put it well recently in saying that “six years after the world economy emerged from its broadest and deepest post-war recession, the holy grail of a robust and synchronised global expansion remains elusive.”
It is not all doom and gloom, though.
Activity in advanced economies has gained some momentum in the past couple of years, with GDP growth picking up to around 2% in 2014-15 from 1.2% in 2013.
This is largely attributable to a strengthening of activity in the eurozone, with continuing solid growth in the US and UK.
By contrast, growth in emerging economies has continued to lose momentum.
It is estimated by the OECD at 3.7% for 2015, down from 4.7% in 2014 and 5% in 2013.
Indeed, growth in emerging economies has been weakening since 2010, when it stood at 7.5%.
Most notably, growth in China slowed from 10.4% in 2010 to an estimated 6.8% in 2015.
Furthermore, the impact of the slowdown in China on other emerging economies, via falling commodity prices and lower imports, has been greater than previously envisaged, with some of these countries going into recession.
There are concerns that the weakening of activity in emerging economies, especially China, could yet hit the recovery in advanced economies.
It is worth noting, though, that to date, the recovery in advanced economies has remained on track and gained some momentum, despite the slowdown in emerging economies.
Indeed, both the IMF and OECD believe that growth in advanced economies could strengthen somewhat further in 2016 and 2017.
There are a number of factors continuing to support growth.
Oil and other commodity prices have seen further sharp declines, which will help to keep inflation at very low levels, thus boosting real incomes and spending power.
Very low inflation has also allowed central banks to continue to pursue very loose monetary policies.
Indeed, more than half of the world economy experienced further monetary easing in 2015.
Fiscal policy is turning less restrictive in most advanced economies.
Labour market conditions are also improving in the major economies, including the eurozone and Japan. Confidence has also improved, while leading indicators, such as PMI surveys, point to a continuation of the upswing in activity.
In particular, recent indicators suggest that the upturn in the eurozone economy may be gaining momentum.
However, downside risks remain for the world economy.
Much attention remains focused on emerging economies to see if growth there begins to stabilise.
Both the IMF and OECD forecast that growth in emerging economies will pick up in 2016 and 2017.
This expectation is conditional on more stable commodity prices and exchange rates, greater political certainty and just a modest slowdown in growth in China.
Oliver Mangan is chief economist with AIB
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