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Another Downturn? Growth Falters and Risk Returns

tightrope

Financial markets have had a worrying opening to 2016.  The causes, so far, have been rapidly falling commodity prices, fears over China’s growth and its “up and down” exchange rate policy, and concerns about central banks’ ability to continue fuelling growth.

A concerning sign for the global economy is the fact that Europe’s top four economies were hit by greater drops in industrial output during December than any forecast had predicted.  Industrial output data released Wednesday for Italy, Britain and France followed news on Tuesday of a shock drop in Germany which had readjusted expectations that economic growth in Europe might be on the rise for 2016.  This has been unwelcome news as the momentum of the world economy falters.

The developments have increased discussion among economists about recession risks in the US, and triggered criticism of the Fed’s December decision to tighten policy – A move which may now be retracted.  The “yield curve” – which plots the yield of fixed-interest securities against the length of time they have to run to maturity – of US Treasury bonds has reached an 8-year low.  Historically, this has been a regular market indicator of recessions.

Janet Yellen, Chair of the US Federal Reserve, made a statement on Wednesday singling out China as a central risk.  There has been no indication of a meaningful slowing of Chinese growth, but she said the depreciation of its currency have “intensified uncertainty about China’s exchange rate policy and the prospects for its economy.”  She explained that “Should any of these downside risks materialise, foreign activity and demand for US exports could weaken and financial market conditions could tighten further.”

In Europe, also, it seems that China is economists’ main concern.  The figures show European manufacturers struggling under dropping demand from China and other emerging economies.  ING’s chief international economist, Rob Carnell, recently stated, “It’s hard to say anything other than that the countries we sell these goods to are not doing so well, and that’s the emerging markets.”

In Ireland, the mood is caution.  The market shows signs of an increased sense of risk. AIB bonds issued late last year are now trading at least 10% below issue price, and Permanent TSB is trading at approximately one third below its IPO price.  Ireland is still rated highly on the markets, but the investment rush may be over. The Global economy is at risk, and it is showing.

By Jack O’Sullivan

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