The global economy is paralyzing – most recently, the World Bank lowered its forecast significantly, global economic output is expected to rise only 2.4 percent. For the skepticism there are several reasons.
The Brexit vote creates uncertainty
Brexit added “new uncertainty” to the weak global economy, warned China’s PM Li Keqiang following the vote by the British to withdraw from the EU. Although economists do not expect dramatic upheavals, “the biggest economic areas are likely to be the most affected by the eurozone,” say Helaba experts. Many economists have already lowered their economic forecasts for Germany and the euro area as a whole. Due to continued uncertainty, companies are likely to put off scheduled investments – in the UK, but also on the continent.
Chinese economic miracle is flagging
The growth engine of the global economy has been weakening for quite some time. Although the economic output of the giant empire grew by 6.7 percent in the second quarter – according to economists, however, above all because significantly more loans were granted. For the full year 2015, the Chinese economy grew by 6.9 percent, the lowest in 25 years. If China is weakening, it will primarily affect the export industry. Economists are also worried about the rising debt burden of unproductive Chinese state-owned enterprises. The banks of the country are now sitting on bad loans in the billions.
Financial system still not crisis-proof
Even eight years after the global financial crisis, the problems of the banks are not yet solved everywhere. On the balance sheets of the Italian banks have accumulated according to official data bad loans of 360 billion euros. This represents one third of total problem loans in the euro area. Given the low economic growth of the country, it would be difficult for banks to solve the problem of their non-performing loans on their own and in a timely manner, the IMF recently warned.
Weak banks are also found elsewhere in Europe, for example in Greece. The problem is that banks that are hired spend less on credit, companies can invest less, consumers cut back on consumption, and this can dampen economic growth.
Low commodity prices are causing problems
Although the decline in commodity prices relieves consumers and manufacturing companies in industrialized countries, it hits some emerging economies in some cases fiercely. So are former hopefuls like Russia or Brazil in recession. Decreasing revenues leaves less room for investment, which in turn can dampen demand for export goods. In addition, according to the World Bank, private debt is high in many developing countries. The low interest rate policy meant that a lot of money was raised. “In the wake of the credit boom, it is not uncommon for the number of bad loans to quadruple,” World Bank chief economist Kaushik Basu warned recently.