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Global economy in the midst of a third crisis

Published Friday, January 8th, 2016

To say that we have had a wobbly beginning to the year would be an understatement. The China factor has hit the market squarely between the eyes. Rather than renewed concerns building up slowly they have exploded out of the blocks catching investors off guard. The Chinese government is propping up a stock market that left to its own devices threatens to go into meltdown. A race to the bottom via competitive devaluations is right back on the agenda. Only the indoctrinated or blind can persuade themselves that the Chinese economy is not fragile and in deep trouble.

Adding to anxieties has been US manufacturing PMI data from the ISM that came in below 50 for December, the very month the Federal Reserve considered the US economy strong enough to take an interest rate increase. The Fed minutes reveal that although the decision was unanimous it was close with several members expressing concern about meeting inflation targets. The odds of the Fed having to reverse course have narrowed this week but could change again later today when we are treated to our first non-farm payroll numbers of the year.

For financial overseers such as the World Bank the rocky start to the year may have been more brutal than expected but has not come as a great surprise. In their latest 6 monthly health check of the global economy they estimate global growth in 2015 at only 2.4% and have cut forecast growth this year from 3.3 to 2.9%. For their oil demand forecasts OPEC have been using much higher growth rates of 3.1% for last year and 3.4% for 2016.

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Posted by David Hufton