Fed's long-awaited rise in rates from zero showed confidence
in the world's largest economy, but first post-crisis rate hike is an unlikely
cure for what ails the rest of the world. With exchange rates dominating the policy
debate in many countries, what happens to the dollar will matter a lot. A
Reuters survey of 120 economists forecast the Fed would hike rates again in
March, but probably won't move as quickly next year as policymakers have
suggested.
Euro zone is finally generating modest growth and
unemployment has begun to fall post massive ECB stimulus. Inflation however
remains well below target, and so ECB stimulus, including the negative deposit
rate, is likely to remain in place through 2016. That puts the world's largest
trading bloc -- and most other central banks -- on an opposite policy path to
the Fed.
China is already having a hard landing from years of
over-investment in unproductive manufacturing plant and speculative real
estate. Emerging world markets are also majorly reeling on account of the crash
in the cost of commodities. Given the slowdown in China and the gloom
surrounding emerging markets, economists point to global growth averaging only
3.4 percent next year with scant prospect of touching 4 percent.
"The key question is whether the U.S. economy is
finally robust enough not only to sustain its own recovery but also to lift
world trade and global growth enough to allow the external deflationary
pressures weighing on U.S. inflation to wane," outlined HSBC economists
Janet Henry and James Pomeroy.
Modest growth in developed economies offsetting persistent
weakness elsewhere but generating very little inflation and keeping interest
rates low. Collapse in oil prices, which has taken the price of crude back to
levels last seen in 2004 has two beneficial effects for the global economy. It
provides additional spending power for households and businesses that consume
energy, and it bears down on inflation.
With no sign that Opec will agree to production curbs, it is
quite possible that prices could fall below $30 a barrel in the early months of
the year, thereby keeping inflation lower than any of the world's major central
banks are anticipating. It will then become harder to raise interest rates if
inflation continues to undershoot official forecasts.
Some emerging market economies are performing better. India
is forecast to grow at a decent pace, underpinned by rate cuts earlier this
year. And optimism about Mexico has also grown as it slowly starts to take
advantage of a recent historic reform in the energy sector. But Brazil one of
the biggest economies in Latin America is in serious trouble, is a country to
watch out for.
"As if predicting exchange rates and interest rates
wasn't hard enough, a strong El Niño may be arriving. So economists and
investors will need to keep an eye on the weather, too." Warned BofA-ML head of global emerging
markets fixed income strategy, Alberto Ades. "
Source: Net Dania
