Global Economic Scenario

Introduction

Whether the current economic scenario prevailing across the globe is an indicator Global Recession? Whether the world is marching towards 2008 again? To understand this let us first understand the current economic outlook and position.

Certain Major Global Indices and How they are performing

1. NASDAQ

On 31 August 2019 NASDAQ closed at 7,962.88 which is -0.13% down. for that day. If you see the change in past 1 year you will observe -1.55% decrease. Oh! Is that means NASDAQ and America are not performing well? To understand the bigger picture lets move to go little more back in the past. Now if we see the change in NASDAQ in past 2 and 3 years then 25.04% increase in 2 years time frame and 52.46% increase since the last 3 years. Means NASDAQ on 31 August 2018 was on 6368.31 and on 31 August 2017 was on 5222.99. That means the NASDAQ is performing absolute okay as the American Economy.

2. NIKKEI

Nikkei is Indice for the Tokyo Stock Exchange which is the world fourth biggest stock exchange today. If you see the performance of Nikkei you will find it has gone down by 9.45% in last one year. For a market which is fourth biggest in the world an approx 10% fall is major impact. However, if we go further in the past the change in last 2 years is 5.39% increase and for 3 years it is 22.60% increase.

3. NIFTY

NIFTY is an indicator for the National Stock Exchange of India. Now let us understand the YoY position of NIFTY. If analyze the YoY change in the said Indice we will find 5.63% decrease since last one year. However, there is 11.41% increase in the past 2 years and 25.46% change since the last 3 years.

4. Summary of Indices

I have summarised in the same way for major indices YoY change for the past 3 years:

Source: investing.com and Moneycontrol.com]

Now if we will see since last one year all the global indices have fallen Shangai composite being an exception. Does this mean that the global slowdown has just started or it was there already but the indices were not able to reflect the same? It can be because the indices are based on the selected stock prices which are totally dependent on demand and supply. Further, the investor’s demand is totally dependent on the future predictability of price or outlook of that stock. Further, it is also known as Investor’s confidence in the market i.e. the market will go up and he will gain from that. Investors confidence is not an exact reflection of the demand and supply prevailing in the economy for the goods and services. In other words, Investor makes his decision based on the two things which are stated below:

1. Past Performance of the Company.
2. The Future Outlook of the business.

Now, the past performance of the company is the summary of the demand and supply only but they are not the live position of the demand and supply. For eg: if a company has declared his results for Q2 of a year which is showing revenue down by 15% as compared to last quarter that means when the company is reporting in Q3 for the demand and supply is different than it was at the time of Q2. As a result, the financial data reflect the demand and supply position in the market but they reflect late.

Coming to the second point, the Future Outlook of the company. Investors predict the future business of the company by considering the following factors:

1. Past Performance

2. Seasonal Position

3. Government Policies

4. Global outlook for that business

5. Technology Changes

So in nutshell, the indices or markets don’t reflect the live position of demand and supply in the economy. Hence, we cannot be based on a just market position can say that it is an economic slowdown.

Other Indicators

So, the question arises what data is required to analyze the economic situation of the world. There is no simple answer to this. There is no systematic way to identify this. The only way is to see the macro indicators together and then to predict based on the information gathered from past scenarios.

So let us look into Macro Indicators of the world economy

1. Growth Rate

I have enumerated the growth rate for the last 3 years for major economies of the world. This data has been obtained from the World bank.

[Source: Worldbank]

As you can see in the above table, the growth rate is within the given range and there is no much variation for the downside. Saudi Arabia, Singapore, and the United States are certain countries who have increased growth rate than previous years. Whether this is an ideal growth rate for the country or not is another story which I will deal in a later article. However, by looking at the macro landscape of the world economy, these rates are appropriate. Furthermore, if you will compare since the last big Recession i.e. since 2009 you will a huge increase. Refer the data obtained from World bank below

[Source: World Bank]

2. Unemployment:

As per the International Labour Organisation:

As the long-term global economic outlook remains modest despite stronger than expected growth in 2017, the report attributes the positive trend between 2017 and 2018 mainly to the strong performance of labour markets in developed countries, where the unemployment rate is projected to fall by an additional 0.2 percentage points in 2018 to reach 5.5 per cent, a rate below pre-crisis levels.

Further, if you will look at World bank data you will find again a decrease in the unemployment rate since the last big Recession. Please find the data below:

[source: World Bank]

3. Interest Rates

If you will look at 10-year bond rates of various countries you will find a decrease in the rates. Now a decrease in the bond rates means the loans are cheaper and hence it will boost the economy more.

source: Bloomberg

4. International Geo-Political Scenario

As we all are aware that no country in today’s time can be fully self -reliant. In other words, countries need each other to develop and to grow. In that situation, international trade wars and cold wars between superpowers will definitely hamper the world’s economy. If we see Asia, US-China Trade War has impacted negatively. Further, South Korea – Japan Trade War, India – Pakistan Kashmir Issue, Saudi Arabia – Yemen, US – Iran – GCC Nations and China – Hong Kong issues. Further, if we move towards Europe then, Br-exit w.r.t. to other EU nations, Ukraine – Russia wars and Huge debt crisis of EU. Hence due to these issues, there has been an obstruction in the free international trade and exchange of ideas. Worlds major financial hubs, London and Hong Kong are suffering from there own problems i.e. Br-Exit and Hong Kong protest. Investors are losing trust and faith in these cities and in their financial capabilities. Further, fast-changing political scenarios are also responsible for the fear which investors have. As a result, there is a huge impact on FDIs.

If the above-mentioned events and tensions continued then there are high chances that the world economy will get negatively effect to the extent of a great global recession. But in the short run, the economy will correct itself once the negative stimulus disappears.