Monday, November 30, 2015

Global Economic Stagnation

Buried deeply within the International Monetary Fund's latest World Economic Output (WEO) issued in October 2015, we find a bar graph that provides us with an interesting look at how the global unemployment picture has changed since the depths of the Great Recession and post-recessionary recovery period and what factors will influence the global economy over the next year.

Here is a graphic showing the unemployment rate for the world's advanced economies at the end of  2014 (blue bars) compared to the maximum level during the period from 2008 to 2014 (red squares):

Keeping in mind that the Bank of Japan, the European Central Bank and the Federal Reserve have employed "heroic measures" to prod the economy back to life since 2008 as we can see on this chart which shows the growth in the balance sheets as a percentage of 2008 GDP for the three aforementioned central banks since 2007:

...for the vast majority of the world's advanced economies, the unemployment rate has declined by a relatively insignificant amount during the "recovery".  While the global markets tend to focus on the unemployment picture in the United States as the key measure of global economic health, many nations including Italy, France, Finland, Austria, the Netherlands, Begium, Luxembourg, Australia, Norway and Korea have roughly the same current unemployment rate as they had at the worst point in the period between 2008 and 2014.  As well, several of the nations that have shown significant improvements in their employment picture (i.e. Greece, Spain, Portugal and Ireland) were part of the PIIGS debt transgressors of the first half of the latest decade whose economies can hardly be regarded as "healthy"

Why should this be of concern?  Here is a graphic showing the IMF recession risks for the period between Q3 2015 and Q2 2016:

Compared to the April 2015 WEO, the risk of recession has risen for most of the world's advanced economies including the United States, Europe, Japan and Latin America.  This is largely because productivity growth as measured using the difference between output growth and employment growth has turned out to be weaker over the period from 2008 to 2014 when compared to 1995 to 2007 as we can see on this graphic:

All economies fall below the 45 degree line with the exception of Spain whose economy reflects changes in temporary and lower productivity jobs over the period from 2008 to 2014.

As well, potential output growth is projected to remain well below pre-Great Recession rates.  

One factor that will not help the global economy and the unemployment picture when the next recession hits is the high level of gross public debt as a percentage of GDP as shown on this graphic:

With major advanced economies having public debt levels well in excess of 100 percent of GDP, governments will find it increasingly difficult to spend their way out of another recession, particularly if it is a deep one that causes a significant contraction in tax revenues.

Despite the intervention of the world's central banks, from this information, we can easily draw the conclusion that the global economy is, at the very least, entering a stagnant phase a conclusion that is also evident from the significant decline in the value of the world's commodities as demand for copper, oil, nickel and other key metals has stagnated as we can see on this chart:

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