The global economy has become so interconnected that important trends and events in one region can have substantial effects on the opposite side of the globe – for better or for worse.
For example, the “Brexit” decision by UK voters to leave the EU has obvious far-reaching implications for the UK and the EU but also affects allies such as the US and potential trading partners throughout the world that may try to fill voids created by the secession.
The semiannual World Economic Outlook published Tuesday by the International Monetary Fund (IMF) provides an in-depth look at some of the factors that should concern business leaders around the world.
Business leaders’ reactions to these factors may depend on their industry sector, location, business model, and other criteria. But the economic trends in the report that finance leaders can’t afford to ignore include:
Political discord and inward-focused policies. Both Brexit and protectionist policy ideas expressed in the US presidential election campaign have resulted from frustration with weak growth and concerns about inequity in income increases.
Protectionist ideas and policies may have a significant impact on global trade, potentially leading to new agreements and tariffs as well as a shift in investment opportunities, as exemplified by Brexit.
Maurice Obstfeld, economic counsellor and director of the research department for the IMF, said during a news conference that the depreciation of the pound associated with the Brexit has a variety of effects. First, he said it reduces the purchasing power of British incomes over imports, resulting in a decline of income for the UK.
“The adjustment reflects the necessity for the UK at this point to adjust downward its large current account deficit,” Obstfeld said. “At the same time, it has arguably helped some sectors of the economy by making them more competitive.”
Immigration. The mass migration of refugees from the war-torn Middle East has the potential to create social and political tension in the areas that accept the refugees.
But the report says migration may also present opportunities for long-term gains such as higher growth and productivity, and relief from an aging of the population. Meanwhile, the countries migrants are leaving may suffer even more, particularly with the “brain drain” associated with the departure of migrants who are young and educated.
China’s transition. The transition of China from a period of booming growth to more balanced growth may lead to lower global demand and reduced commodity prices. But some emerging markets may stand to gain, the report says, as China moves up the value chain and imports more consumption goods.
If this transition is handled well, China’s economic transition will eventually result in more sustainable global growth, the report predicts.
Low commodity prices. Decreased consumption in China and increased production of commodities (such as shale oil in the United States) has led to a price slump that doesn’t appear to be ending soon.
“The fall in commodity prices is likely to be long-lasting, and so it really calls for commodity exporters to diversify their export bases and their economies more broadly, and this is going to require investment,” Obstfeld said. “It will also, by the way, require a welcoming international trade environment.”
He said the push towards greater trade restrictions would make it more difficult for lower-income developing countries that rely on exports to grow.
Effects of low interest rates. The long-term effects of low growth and low interest rates could cause continuing challenges for banks’ profitability and place the solvency of life insurance companies and pension funds in jeopardy, according to a summary of the IMF Executive Board’s discussion that was included in the report.
“These risks and challenges could, in turn, further weaken economic activity and financial stability more broadly,” the summary said.
Financial regulatory reform. Changes to accounting standards and other regulations have focused on increasing bank capital and liquidity buffers following the recent economic crisis.
These changes are affecting financial institutions across the world – and by extension may affect the corporate and individual clients they serve.
—Ken Tysiac (email@example.com) is a CGMA Magazine editorial director.