The global economy is entering a challenging phase. China’s growth slowed to 7.3% in Q3, affecting commodity exporters. In Japan, Abenomics seems to be losing its impact. Dilma Rousseff, recently re-elected in Brazil, faces the tough challenge of revitalizing the economy. Oil prices have fallen to around US$80 per barrel and could drop further. This will impact oil-producing countries like Canada, Russia, parts of South America, and the Middle East. While manufacturers and other oil users may benefit, new production techniques could suffer, and the US’s energy self-sufficiency goal may be impacted.
Of course, there are areas of optimism globally. The US continues to add jobs steadily, the UK is expected to grow faster than any other major advanced economy in 2014, and Canadian business leaders remain positive. At our global conference in Montreal, I discussed growth prospects with the local Council on Foreign Relations. Notably, business leaders in Quebec are even more optimistic about their economy than their counterparts in broader Canada. However, they express concerns that bureaucracy and regulatory red tape may hinder their operations as they become more integrated into the global economy.
The major concern remains the eurozone. The European Union is the world’s largest single market, with 19 countries using the euro, accounting for about a fifth of global output. After the sovereign debt crisis, Germany showed strong growth, but its economy contracted by 0.2% in Q2 and may already be in recession. Business confidence dropped by more than half in Q3, according to our International Business Report (IBR). Without Germany’s support, net business optimism in the eurozone fell to just 5% in Q3, the lowest since Q2 2013.
The major worry across the eurozone is deflation, which can severely damage an economy. Japan’s experience in the 1990s illustrates the dangers: businesses and consumers cut spending, expecting lower prices, while negative inflation raises the real cost of borrowing. This results in both demand and supply shrinking. Only 10% of businesses in the eurozone expect to raise prices in the next 12 months, compared to 33% globally. Meanwhile, most businesses in France (-12%) and Greece (-4%) expect prices to fall, and prices in Poland (0%), the Netherlands (2%), and Spain (3%) are nearly flat.
The solution touted by many economists is monetary expansion - such as the quantitative easing (QE) programmes launched by the UK and US. France and Italy would like to see (and appear to have won) a relaxation of eurozone budgeting targets (which they were likely to miss anyway) to give them the space to boost growth. However Germany is resisting further interventionism by the European Central Bank and is prescribing more austerity for its single currency partners.
Germany posted its biggest budget surplus since reunification in the first half of 2014 and Christine Lagarde, head of the IMF, suggested it should use this fiscal power to boost demand across the region by investing in infrastructure. Annual investment in Germany amounts to 17% of GDP compared to 21% for its peers and infrastructure improvements would of course have the added benefit of increasing the long-term growth potential of the economy.
I will be watching the eurozone situation closely in the coming weeks and months. Recent European data has caused ripples in global stock markets, including in the US. The Mittelstand has long been a key driver of Germany’s success, but in Q3, the number of businesses citing lack of demand quadrupled to 23%, with many now expecting to reduce their workforce. Politicians must take these concerns seriously and do all they can to support the growth prospects of dynamic businesses across the region.