Getting back on our feet and soldiering on

Getting back on our feet and soldiering on

17-11-2015 | 年次アウトルック

In terms of global economic growth, 2015 was not much to write home about and Robeco’s Chief Economist Léon Cornelissen expects 2016 to be at best only marginally better.

  • Léon  Cornelissen
    Chief Economist

Speed read

  • Europe can benefit from influx of refugees
  • Japan soldiers on with even more Abenomics
  • China will get economy back on its feet
  • Most attractive region in 2016 will still be US

The economic heavyweights – the US, Europe and China – are each facing their own set of problems. However Cornelissen doesn’t share some economists’ fear that the markets will lose confidence in the key central banks if their quantitative easing policies don’t deliver tangible results. “It’s still too early for a crisis of confidence.”

Many eyes will remain fixed on Europe in 2016 – a logical consequence of the growing migration problem. In economic terms, Cornelissen thinks this situation will mainly be beneficial. “It could prove to be a blessing in disguise. Europe is now hampered by restrictions imposed by the Treaty of Maastricht, which leave little room for further fiscal stimulus. However the European Central Bank is an advocate of this and now that Europe is awash with refugees, some of these restrictions could simply be lifted. Recently, Pierre Moscovici (European Commissioner in the Juncker Commission) remarked that Government deficits would be taken less seriously.”


Europe: "Wir schaffen das schon"

After all the problem needs to be dealt with, says Cornelissen, even if certain countries are still in denial. There needs to be a more central approach. “Europe is pandering to Turkey now, which is logical because it needs strong controls along its borders. The fact that this comes at a price is logical.” As yet Cornelissen is less concerned about the right-wing shift currently taking place in various EU countries, although “the lack of enthusiasm for solidarity in France and the growing strength of the National Front may undermine stability there.”

‘A Brexit would be a huge blow for Europe and an even bigger one for the UK economy’

“As the Germans say: ‘Wir schaffen das schon.’ The flow of immigrants may have a positive impact on economic growth in Germany. Initial estimates are 0.2%, but the real effect will be significantly greater. Helping these refugees into work is the best solution, even though this will increase pressure at the bottom end of the labor market, of course.” Cornelissen is more worried about the UK’s in/out referendum. “Cameron will likely want to hold this in the spring of 2016 – to be well ahead of the Bundestag elections in Germany and the French presidential elections.“

The impending mid-term blues (reduced momentum for the governing party once it has been in power for two years) are already looming, so speed is of the essence. A Brexit would be a huge blow for Europe and an even bigger one for the UK economy. It would cut itself off from the world’s largest market – ‘self-dwarfing’ as the Frankfurter Allgemeine calls it. The Scots will in turn also demand a new referendum, bringing the threat of a ‘Scoxit’.

China will be fine too

The Chinese government has made mistakes in recent years in its rush to devalue the yuan. But it still has enough instruments at its disposal to kick-start the country’s spluttering growth engine. The fact that the Chinese currency is soon to be included in the IMF’s SDR (Special Drawing Rights: a basket of reserve currencies) is perhaps not strictly by the book, says Cornelissen, but it may give China a boost. “The new Five Year Plan will be presented next year too. It’s the same old song: structurally lower long-term growth, further implementation of the economic transition, but it works.” At any rate Cornelissen is ruling out a further sharp depreciation of the yuan for the next six months. After this, there may well be room for further a currency devaluation, if only to stem the further outflow of capital. 

And Japan? It’s soldiering on

Three new Abe arrows have been unveiled – before the first three have even been shot. “These are intended to stimulate nominal GDP growth. But there is no time frame or details of how it is supposed to work. In the meantime pressure on the Bank of Japan is rapidly increasing.” So far Abenomics has been very disappointing and the only solution Japan has for this is even more Abenomics. The IMF’s claim that the country is ‘relying too heavily on monetary policy’ in the absence of any better alternative is also dampening sentiment. What’s more, there is no credible opposition in the country and the next elections are not anticipated until 2018. It will be just more of the same in Japan for the time being, Cornelissen fears. 

US: forever number 1

Things are not all that rosy in the US either. Renewed political deadlock between the president and his Congress seems to be on the cards, the government’s job creation plans are bearing little fruit and the low oil price means that the shale revolution is also losing steam. Yet of all the economic powers, the US is still the ‘convincing’ winner, thinks Cornelissen. “The country is much better equipped to absorb external shocks.” The skirmishes surrounding the late-2016 presidential elections are already in full swing. Cornelissen thinks that a Democratic president is the most obvious outcome. He or she will probably have to deal with a Republican-flavored Congress though – a combination that promises little in terms of stimulus for the US economy. However history has proven often enough that this country’s economic resourcefulness and resilience should never be underestimated.

‘The stabilizing oil price will silence the deflation hysteria’

Deflation hysteria ebbing away

All in all, the outlook for the global economy is not much to write home about. “Toil is perhaps the right word,” says Cornelissen, who nevertheless thinks we should be careful about excessive pessimism. “But the patient isn’t ready to get out of bed and start swinging from the chandeliers yet. In fact, he isn’t even off the drip. And this, seven years after the collapse of Lehman Brothers, isn’t a particularly uplifting observation. But there is hope. “To get out of debt, you need real growth and real inflation. Now that the oil price is stabilizing at a low level (between USD 40 and USD 60), the deflationary pressure it exerts on inflation is ebbing away. This will silence the deflation hysteria.” Which is good news for central banks and eventually also for the global economy.


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