Worldwide: What Happened Over The Summer

Last Updated: 11 September 2015
Article by Ian Stewart

Most Read Contributor in UK, August 2017

July and August tend to be pretty thin months for media coverage of economics and finance. With the holidays over here's a short primer on what the global economy did over the summer.

The main news is that China's slowdown has replaced Grexit as the number one worry for policymakers.

China's economy has been on a slowing path for the last four years. Over the summer concerns about the pace of the slowdown mounted and the Chinese stock market slumped. Official interventions to support equity prices failed to reverse the decline but prompted unease that the Chinese government may be rowing back on pro-market reforms.

In August the People's Bank of China sought to boost China's economy by letting the yuan devalue. This comes after four successive interest rate cuts by the PBOC over the last year.

Investors have not been reassured. The Shanghai Composite equity index has fallen 42% from its peak in June. Lesser, though marked, declines have been seen in Western equity markets.

China's slowdown is centre stage, but it forms part of a wider slowdown in emerging economies.

Capital outflows provide one the most obvious signs of declining confidence. Almost $1tn of capital has flown out of the 19 largest emerging market economies in the last year, double the amount that left during the financial crisis.

Growth prospects for commodity exporting economies including Brazil and Russia have been especially hard hit. Brazil's economy is expected to contract this year and next. Its Bovespa index is down by a fifth from its June peak. Russia's RTS index is down 25%.

Concerns over stalling growth in China and a supply glut have pushed commodity prices down to a 6-year low. Energy and metals prices were badly hit over the summer, and the price of Brent crude has fallen by a quarter from its May peak.

In sign of the strain lower oil prices are putting on the finances of the world's largest oil exporter, Saudi Arabia has announced cuts to public expenditure and unveiled plans to raise $27bn by the end of the year from international bond markets.

Recent declines in commodity prices are feeding into lower inflation in western nations and will boost incomes and consumer spending power. In the UK, the latest data show that real wages are rising at their fastest pace since the financial crisis and in August consumer confidence has hit a 15-year high.

The European Central Bank's  President, Mario Draghi, indicated last week that the Bank stands ready to expand its quantitative easing programme if weakness in emerging markets starts to hit the euro area. Bank of England Governor Mark Carney has sounded a more confident note, sticking to his earlier formulation that the decision on raising UK rates is likely to, "come into sharper relief around the turn of the year".

Until the recent stock market sell off the Federal Reserve was widely expected to raise US interest rates for the first time in more than nine years at its meeting of 17th September. The decision now looks finely balanced. The latest data show that US growth accelerated in the second quarter and the recovery seems to be on track. But our guess is that the Fed will hold back from raising rates to assess the severity of the emerging market slowdown and the scale of the risks it poses to America's recovery.

The growth picture for Europe has not changed much over the summer. Much of the data from the major economies of the euro area have been uninspiring, but growth is coming back to two nations that suffered major recessions during the financial crisis. Spain registered its fastest growth in eight years in the second quarter and Ireland looks on track to grow by a heady 5.0%+ this year.

Over the summer Greece managed to stave off crisis yet again, this time by securing a €86bn bailout from creditors. Soon after the agreement, Prime Minister Alexis Tsipras resigned and called an election for 20th September. Mr Tspiras' aim of securing a strong mandate in the election has been threatened by the recent rise of the conservative New Democracy party in the opinion polls. The Greek crisis may be in abeyance, but it would be premature to say it is over.

The news from the UK economy has been fairly positive over the summer. Growth accelerated in the second quarter and forecasts for GDP growth for 2015 and 2016 have edged higher. The momentum of the UK recovery has been sufficiently good to persuade the Confederation of British Industry to slightly bring forward its forecast for the timing of the first interest rate rise from April to the first quarter of 2016.

The strength of the US and UK economies continued to feed through into further gains for the dollar and the pound. The dollar is up by 20% from last year's trough and the pound has risen by 8%.

On the political front two surprise contenders for high office have emerged on either side of the Atlantic.

In the UK, Jeremy Corbyn – who in June was rated as a 100/1 outsider by bookies in Labour's leadership race – now looks the most likely winner. Mr Corbyn is significantly to the left of both the other leadership contenders and the Parliamentary Labour Party as a whole. The results on the election will be announced next Saturday, 12th September.

In an equally surprising development Donald Trump is now leading the race to become the Republican Party candidate for next year's presidential elections. Mr Trump has enjoyed a summer surge in support and, with a double digit polls lead, is the candidate the others have to beat.

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