EDITOR: | October 20th, 2014 | 1 Comment

The impact of ebola and oil wildcards on the global economy

| October 20, 2014 | 1 Comment
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Global economy: IMF points to fissures, downside and short-term risks

Financial markets danced wildly in the first half of October as investors contemplated the importance of economic indicators and realized the global economy is showing signs of weakness.

The IMF released its biannual World Economic Outlook in October pointing to downward revision in global economic growth for the second half of 2014.

Despite setbacks, an uneven global recovery continues. Largely due to weaker-than-expected global activity in the first half of 2014, the growth forecast for the world economy has been revised downward to 3.3 percent for this year, 0.4 percentage point lower than in the April 2014 World Economic Outlook (WEO). The global growth projection for 2015 was lowered to 3.8 percent (www.imf.org).

Ever since the financial crisis of 2008, the global economy has never recovered its momentum, but there have been several alluring trends. Now some of those positive trends are looking like one night stands in a hurry to disappear into the pre-dawn darkness.

An unexpected drop in Chinese steel demand is a first sign of trouble. In Germany, a reduction in exports is raising the sobering thought that the country may not always be the EU’s economic engine. From Brazil to Russia, emerging markets have failed to live up to expectations that they would provide the next wave of global growth.

Salvation may come from the U.S. economy, which has shown vigour this year. But with Europe and emerging markets slowing down the global economy is dependent once again on U.S. consumers. We might not depend on the American consumers as we did in the past. Rather the IMF believes investment in infrastructure by governments is a key to economic recovery.

But there are two wild cards that may affect the second half of 2014.

A first wild card is the Ebola crisis. Finally, the WHO recognized it had fumbled the ball in Africa by letting political appointees drive the bus over a cliff. The IMF has yet to factor in the Ebola epidemic, which so far is too young to have been integrated into economic data. Last week’s response by global leaders, who so far had been ignoring the progression of the virus is encouraging though we maintain as we did last week that health authorities seem to struggle with understanding its epidemiology. That struggle will cause even more fear. We reported last week that ninety percent of economic impact of an epidemic is fear-based. The infection of Texas health care workers who took care of the now deceased Thomas Eric Duncan is a sobering development that prompted President Obama to caution against hysteria.

Oil is a second wildcard as its effect on the global economy, including Russia is worrisome. While fracking is highly debated, its deployment in the U.S. has loosened the global oil demand and forced producing countries to fight for market share. Russia is one such country

In 2013, Russia derived half its federal budget revenue from mineral extraction taxes and export customs duties on oil and gas, according to the U.S. Energy Information Administration. That makes its economy highly sensitive to movements in crude markets. Global benchmark Brent oil, which sold on Thursday for $85.02 a barrel, has lost about a quarter of its value since the start of the year. But according to The Economist Russia needs oil above $100 a barrel to balance its budget. Arguably the last time Russia was in such as deficit in oil price, we ended up with Glasnov.


Dr. Luc Duchesne

Editor:

Dr. Luc C. Duchesne is a Speaker and Author with a PhD in Biochemistry. With three decades of scientific and business experience, he has published ... <Read more about Dr. Luc Duchesne>


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Comments

  • Asher Berube

    Thank you for sharing your insights, Investments in infrastructure will hopefully re-establish market momentum which would likely also improve economic prosperity.

    October 20, 2014 - 10:57 AM

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