Diversification an increasing priority for commodity-dependent economies
Many economies in the Middle East and Latin America have also seen their prospects dented by commodity price falls. Their efforts to rebalance and diversify away from commodity-driven growth can only become more important to achieve greater economic stability. To that end, for example, Saudi Arabia has a dedicated investment fund of $2 trillion[3] whose express purpose is investment in economic development and innovation to move away from reliance of fossil fuels as the main economic driver[4].
China’s rebalancing act
Slowing growth in China has had a considerable impact on other economies both in terms of reliance on China as an export destination and, again, due to China’s shrinking appetite for commodities. China’s high debt levels also present a potential, and sizeable, systemic risk whose impact would be felt globally were there to be a sudden shock. To date, the Chinese government has managed to avoid a hard landing. However, as it puts measures in place to support growth in the short term, it raises the risk of a sharper correction further down the road – and this remains a significant risk to the global economy that businesses need to monitor.
Hard currency borrowing risk
There is also a risk that some emerging economies with large foreign currency borrowings in dollars may run into problems that could rebound on the western banking system – particularly as and when the US Federal Reserve begins to raise interest rates again. The current perception is that the strengthening of the western banking system post-financial crisis through enhanced capital and liquidity requirements makes it better placed to withstand those risks than it was in, say, the 1980s, when the Latin American debt crisis struck. But there could still be some problems to come here.
Developed economies - slow growth, but growth nonetheless
The developed economies have continued to grow, albeit somewhat sluggishly by historic standards. The US economy is growing at about 2%, Japan at around 1% and the Eurozone at a rate in the region of 1.5%, with most member states recovering slowly.[5] Some smaller economies are achieving faster growth than this, for example Ireland and Spain although serious concerns remain about Greece and, to a lesser degree, Italy where growth has been low and the banking system fragile. The UK’s vote to leave the EU, as well as potentially leading to a marked slowdown in growth in the UK, could also have wider implications for the future of the EU and growth in that.
David Wijeratne
