Economics

TalkingEconomics: Global storm clouds lift

While fears over Greece and Asia have faded long-term concerns persist. Keith Wade takes a look at the underlying issues that could impact the global economy.

17/08/2015

Keith Wade

Keith Wade

Chief Economist & Strategist

30 Minutes
Unstructured Learning Time

CPD Accredited

The Greek can has been kicked, but only as far as the thorny thicket of debt forgiveness. Meanwhile, the Chinese authorities’ efforts to stabilise the stockmarket are papering over bigger problems of overcapacity and misallocated resources.

The drop in commodity prices has heightened fears of global recession. However, the balance of risk is tipping toward higher inflation rather than recession in economies like the US and UK.

Kicking the can in Greece…

The Greek parliament's decision to pass a slew of new austerity measures on 16 July marked a turning point in the euro crisis and the way is clear for talks to begin on a new €86 billion bailout.

 

Markets have breathed a sigh of relief, but neither the Greek government nor its creditors are happy.

On the creditor side a split has opened between the International Monetary Fund (IMF), which advocates considerable debt forgiveness, and German Finance Minister Schäuble, who has ruled out any haircuts.

Schäuble will be dusting off his plan for a temporary Greek exit from the euro if the negotiations do not go as planned.

The next crunch point may not come until next quarter or early next year when the IMF needs to decide whether to roll over its current loan which expires in March 2016.

In the absence of debt forgiveness there is a strong possibility that the IMF chooses to provide no further funding.

However, Germany and the European creditors have insisted that the bailout will not occur without the IMF’s involvement.

Now we may see the Greek prime minister trying to persuade a reluctant IMF to stay involved.

No doubt Schäuble will be dusting off his plan for a temporary Greek exit from the euro if the negotiations do not go as planned. For now though, the Greek can has been kicked.


For a more in depth review of the global economy in August 2015 try:

TalkingEconomics: China's equity boom and bust

TalkingEconomics: Eurozone political risk shifts to Iberia

TalkingEconomics: Full August 2015 economic infographic


…and in China

Asian storm clouds have also lifted a little as the Chinese authorities act to stabilise the A-share index.

However, fears of a hard landing in China persist as investors weigh the risk of a misstep by the authorities.

Recent official action may have reduced the weight attached to this scenario, but as with Greece, the can has only been kicked and the underlying problems of overcapacity and misallocated resources in China remain.

Commodity price falls: harbinger of global recession?

Hard landing fears have also been fanned by the drop in commodity prices.

China is vulnerable but the desynchronised nature of the global recovery means that for economies like the US and UK, lower commodity prices may extend the cycle as they help quell fears of inflation.

Policymakers will be weighing these developments against the evidence of increased inflationary pressure in the domestic economy through the tighter labour market.

We continue to look for the first Federal Reserve rate rise in September with the Bank of England following in February 2016.