The next wave of crisis or just a sneeze on the financial markets?

From time to time, the global economy faces a crisis. Are we at a critical moment? Low commodity prices, uncertainty about the development of emerging economies such as China, problems in Europe and debt levels that have taken developed economies to a record highs entitle us to ask whether the next wave of the crisis is just around the corner? By Sergiusz Prokurat In the book "Bikenomics," Elly Blue is right to assert that a bicycle is not as simple a mechanism as it may seem. Particularly because it pays to look, not only at the bike, but also at the person pedaling, who uses the bike to achieve their goals. No matter if the chain breaks, a tire bursts, or we collide with other participants in the race – in the end, when we have an accident, the bikes runs into others, knocking them down. Countries participating in the global economy resemble participants of a bicycle race, and once in a while we can see a spectacular crash. Is the crisis going to strike the global economy in 2016? Global uncertainty Carlos Artreta, Lead Economist at the World Bank’s Development Prospects Group, claims that global economic prospects have become more uncertain. However, the likelihood of a global crisis appears to be low at this stage. At present, we expect global growth to edge up to 2.9 percent this year, from 2.4 percent in 2015, as recovery in advanced economies continues and headwinds for major commodity exporters gradually diminish. The World Bank report “Spillovers amid Weak Growth” warns that the slowdown in developing countries could spill over into other countries and threaten the initiative of pulling people out of world poverty. [negative] There is a risk that the slowdown observed in recent years becomes more protracted than currently expected and is accompanied by greater financial market turbulences [/negative] In recent years a few things have changed. Back in the 1990s, everyone nodded when economists expressed their opinion. Now it is different. We live in times of economic conformism. The objective is to maintain the status quo. Less than ten years ago, in 2008, we witnessed the deepest crisis since the Great Depression of the late 20s and 30s. We had to wait several years for economic recovery. Although it ultimately took place, the economic growth that occurred after the crisis came from a different source than what we have seen in the whole of the last century. Gimmicked bailouts Recovery was driven by government bailouts and a modern monetary policy, which nobody would have called a stabilizer two decades earlier. The first to experiment was Japan, whose central bank – nearly 15 years ago – unable to cut interest rates, started to revive the economy through commercial banks. This gimmick was picked up by the FED, the central bank of the US, which printed a total of $3 trillion following massive capital injections in the form of programs such as quantitative easing. Part of the money fled to emerging markets, Asian countries and BRICS. The remaining part contributed to maintaining the status quo, which nobody wants to change. The problem is that just as you cannot stop the sunset by a decree, so monetary expansion, pumped with cheap money cannot last forever. These days, saving economies is like the relentless pumping of a bicycle wheel. You can ride with the punctured tire if you continuously provide it with the air that is leaking out through the hole. So, if an economy has a hole in it, and the air leaks out, it may turn out that we cannot ride any further and find ourselves on the verge of an upcoming global recession. Artreta from the World Bank slightly calms the situation: “The likelihood of a global crisis appears to be low at this stage. However, there are some significant downside risks to global growth that have become increasingly centered on emerging and developing countries in recent months. There is a risk that the slowdown observed in recent years becomes more protracted than currently expected and is accompanied by greater financial market turbulences.” [caption id="attachment_98272" align="alignleft" width="300"] Image: shutterstock[/caption] In January, economists predict what the upcoming year will hold. And they unanimously admit, according to some symptoms, that a recession may soon be on the horizon. The debt crisis, which came to light in Europe after the 2008 crisis, has become a permanent concern of the Old Continent. PIIGS (Portugal, Ireland, Italy, Greece and Spain) were given bailout funds several times by the European Union and the IMF so that they could avoid embarrassing budget cuts, unwanted by the societies of southern Europe. Austerity programs were so unpopular that the Greeks elected an anti-austerity government, followed by a referendum that rejected the conditions under which support was to be granted by European Union countries. If Greece, although it is a relatively small part of the euro zone, left it or even the EU (Grexit), it could undermine the euro’s existence. Consensus is impossible to build in conditions when all parties feel that they have lost. Milton Friedman once made negative comments about the euro, arguing that it was difficult to assume that in the long term it would create a stable system. As we witness this sad landscape, lacking in European unity, let us ask a question: is it really so surprising that the UK is seriously considering Brexit, i.e. exiting the European Union. Both the Brexit and Grexit could lead to a recession, and if Greece leaves the euro zone, it will encourage other countries to make a similar move. This may result in the collapse of the euro or diminish its significance, which in turn will bring negative consequences to the world economy. Chinese dilemma Outside Europe, the source of the crisis can be found in the recent events in China. Over the past few decades, the Chinese economy has been developing at an unprecedented speed. Chinese GDP is the world’s second, right after the US, and it is only a matter of time before China overtakes the US in terms of gross domestic product calculated in nominal terms. If we take into account purchasing power parity (PPP), China became the world’s largest economy in 2014, according to data from the International Monetary Fund. Hats off to the entrepreneurial Chinese society. But let us keep in mind that this is also a great responsibility to the world. In the so-called “Central State”, capital is under governmental control, in order to stop the money from flowing abroad. For this reason, the dynamically growing Chinese middle class has relatively limited options when it comes to investing their new-found wealth. And it is not about the fortunes of tycoons, who know no limits, but average citizens. As a result of capital controls, the two areas where the middle class could invest their assets are: the stock market and the real estate market. “Both markets are experiencing the effect of an overinflated bubble that is eventually going to pop,” says Christine Palonka from the Poland Asia Research Centre. A few months ago, the world was flooded with the news that the Chinese stock market had an average price-earnings ratio higher than anywhere in the world, even higher than before the dot-com bubble in the US in 2001. This may suggest that the Chinese stock market is one of the most unrealistic stock markets, providing overestimated valuations. Until recently, making a transaction on the Shanghai Stock Exchange was more like buying a lottery ticket than making an investment. It is no surprise that a correction was made. Exhausting sources The same happened with the boom on the Chinese real estate market, which led to a bubble in the residential sector. It is not even about the ghost cities, whole neighborhoods where nobody lives, but about the two following facts – that Chinese society will soon begin to age rapidly and that the current Chinese model has exhausted its sources. The number of people who can be moved from farms to factories has come to an end. If we take into account these two trends, it may turn out that housing prices undergo a dramatic correction. If the Chinese economy falls into recession, it is likely that it will involve the rest of the world. Since the beginning of the year, we have seen money fleeing Chinese markets. So far, trading on stock exchanges in China has been suspended twice. The pressure associated with capital outflows and a decline in the yuan is huge. The Chinese government will not allow a currency fall, because it could affect all those entities in China who have indebted themselves in a foreign currency. We do not know for sure how sick the Chinese economy is and whether the current correction is just a sneeze or a serious illness which could become contagious at any moment. Third wave The shrinking of the Chinese economy has a huge impact on global commodity prices, which is reflected in the situation of commodity suppliers, mainly Russia. Undoubtedly, this will also reflect negatively on the state of the Polish economy, which among all EU member states is the most dependent on trade with Russia. Thus, the following question arises – are we facing the risk of the third wave of the global crisis, which may be caused by the economic situation in the BRICS countries, namely Brazil, Russia, India and China, who were until recently the leaders of global economic growth? Artreta from the World Bank says that in 2016 there are no grounds to claim so: “We currently project growth in the largest emerging markets - the BRICS countries (Brazil, Russia, India, China, South Africa) – to pick up this year, averaging 4.6 percent, up from a post-crisis low of 3.9 percent in 2015. China’s gradual slowdown and economic rebalancing is continuing, the recession in Brazil and Russia should slowly abate, and the robust pace of growth in India should continue to pick up.” Usually, when there is a slowdown, central banks apply an expansive monetary policy to stimulate the economy by lowering interest rates, opening market operations or through programs such as quantitative easing. Back in 2008, central banks were able to lower interest rates even more. However, because we live in a world of interest rates close to zero and even negative interest rates, this tool is no longer effective. Now, central banks have far fewer opportunities to counteract the recession. To make matters worse, programs such as quantitative easing are one big experiment, the consequences of which we do not know. The global crisis is always going to be critical for Poland. The European Commission and the OECD predict that in the next 25 years the growth rate of our economy will remain at only about 2 percent. Meanwhile, government forecasts assume that GDP growth for at least the next year will be twice that. Local Polish forecasts are optimistic – reduced unemployment and wage growth associated with the more notable lack of skilled workers, plus higher economic growth compared to the countries of the old EU. Interlinked vessels The problem is that any assumptions may pop like a bubble because we are dependent on the condition of the global economy. All markets are interlinked like vessels – thus, the world crisis would bring Poland to the ground, regardless of assumptions. In a sense, Poland is a bit like an alpheid shrimp that is dependent on fish from the Gobiidae family. The shrimp must dig a hole, which is used by both creatures, and because the shrimp is blind, it is heavily dependent on fish – just as Poland is dependent on other countries such as China and the US. The Alpheus shrimp keeps a lookout for the fish, constantly touching it with one of its antennae. Once the fish signals that danger is coming, the Alpheus quickly retreats into the hole. It comes out only when the alarm is called off. Being such an Alpheus, Poland is bound to careful observation of world trends. They are much more important than daily events in Poland, nonetheless, they often go unnoticed.