Oct. 07--The world's economy is at the most risk since the 2008-09 recession, and the U.S. is already showing the stress.
So says the International Monetary Fund, which oversees the world's financial system. In a lengthy report this week it warns that the globe is in the worst shape since 2009. The U.S. and Europe have been healing, but serious economic deterioration in emerging markets like Brazil threatens even the strongest areas, including the U.S., the IMF said.
The IMF has continually overestimated the strength in the global economy as it has tried to recover from the impact of the 2008 U.S. financial crisis. In reports twice a year, it has repeatedly had to lower expectations from previous forecasts.
This time, as it cut its forecast for global growth to just 3.1 percent, IMF economist Maurice Obstfeld said in the report, "Six years after the world economy emerged from its broadest and deepest postwar recession, a return to robust and synchronized global expansion remains elusive." Growth now is only comparable to 2008's.
Meanwhile, although the report is the most alarming in years, some analysts think that investors have looked ahead at the hardships and have already driven emerging market stocks, currencies and commodities down to the point where the worst of the decline is over. Over the last 52 weeks the MSCI Emerging Market index has declined about 18 percent.
The MSCI All-Country World Index, which measures stock performance throughout the world, has been climbing for six consecutive sessions. The Malaysian and Indonesian currencies, which investors were worried about, have jumped considerably the last few days. Even the Thai baht, which analyst David Rosenberg of Gluskin Sheff calls a "proverbial canary in the coal mine" for the Asian region, rallied "an impressive 1.3 percent."
The U.S. stock market has been climbing for the last eight days, with the Dow Jones industrial average now down just 5 percent for the year after previously falling more than 10 percent.
Yet investors remain far from sanguine over emerging markets, and some analysts think that the troubled areas of the world are just getting a temporary reprieve due to the Federal Reserve backing away from raising interest rates. Rising rates are poison for emerging markets. Many have borrowed huge amounts of money that has to be paid back in dollars. And since higher rates inflate the value of the dollar, emerging market companies need to make more money so they can come up with enough to pay back those loans. But sales of emerging market metals and oil have plunged. As a result, growth is slowing, not gaining, aggravating the ability of emerging markets to pay loans and borrow what's essential to keep businesses running.
In addition, with higher rates investors will be able to invest in safe U.S. government bonds and earn higher interest. That leaves emerging markets in the lurch. Until recently, investors were buying emerging market bonds to earn higher interest than they could make on U.S. bonds. But with U.S. bonds more attractive, investors are snubbing emerging market bonds -- leaving the countries unable to access the money they need.
This interferes with further growth. They are already having trouble growing because China, the second largest economy in the world, is slowing and sharply reducing its demand for oil and metals, like copper, that emerging markets depend on selling.
This may all sound like a distant problem, but it's not. Large U.S. companies depend on overseas markets for about 40 percent of their sales. This week, Yum Brands, home of Pizza Hut and KFC restaurants, reported dismal sales in China. Yum used to be an investor darling because it was doing so well in China.
The U.S. is having trouble selling overseas, Moody's Analytics economist Bernard Yaros said in a note to clients Wednesday. Nominal exports fell 1.96 percent in August, "the second largest monthly decline since 2012 after January's plunge," he said. "Goods exports declined" in almost all categories. He noted "hesitancy by foreign producers to commit to investments."
The International Monetary Fund called emerging market banks "vulnerable" because of the rising chance that companies won't be able to make their loan payments. That could weigh on countries too, if governments must step in to help bail out those with problem loans.
To some extent these problems are a hangover from the United States' financial crisis in 2008. To keep from having their economies spiral down, emerging markets borrowed heavily as the U.S. fell into a deep recession, and now the emerging markets are left with huge debt problems that a strong dollar makes difficult to pay.
Said the IMF's report: "Many emerging market economies relied on rapid credit creation to sidestep the worst impacts of the global crisis." Now "banks have thinner capital cushions, while nonperforming loans are set to rise as corporate earnings and asset quality deteriorate." The IMF concludes: "The global financial system faces an unprecedented adjustment."
gmarksjarvis@tribpub.com
