Financial market turmoil
ON the last day of the World Economic Forum in Davos, a highlevel panel of finance officials discussed the continuing turbulence in the financial markets and identified the risks facing the global economy. Over the past few months, a range of financial assets, including equities, commodities and currencies of emerging markets, have fallen sharply. According to an estimate, nearly $15 trillion in value has been wiped off from the world's financial markets since their peak. The meltdown on the world's financial markets has gathered pace since the start of 2016. The S&P 500 has fallen 9pc, while the Morgan Stanley Capital International's MSCI Emerging Markets index has declined 11pc. The S&P Goldman Sachs Commodity Index (S&P GSCI), a benchmark index for commodities, has gone down 13pc. According to the Institute of International Finance, capital outflows of nearly $735 billion took place from the world's emerging markets in 2015, with an estimated $676bn from China alone.
The slowdown in China is the primary reason for the jitters hitting the world markets. According to the latest data, industrial activity, manufacturing output and China's construction and export sectors have been facing recession. Over the past many years, China has been the main engine of global growth. In 2013, China accounted for 49pc of the expansion in global GDP for the year, versus a contribution of 29pc by the US economy for the year. In terms of imports, China absorbed around $2tr of goods from the rest of the world in 2014. It is the biggest export market for 43 other countries, ranging from Australia and South Korea to South Africa and Brazil. The slowdown of China's economy and its chain effect on global demand has been reflected in the international commodity markets. The 75pc collapse in the price of benchmark Brent crude since July 2014 has as much to do with excess production as with falling demand. China's official GDP growth for 2015 stood at 6.9pc, its slowest economic expansion in 25 years. From its recent peak of over 14pc growth in 2007, the 2015 growth rate represents a halving of China's annual economic expansion.
The sluggishness of China's economy notwithstanding, the panelists at Davos took a generally optimistic view of the global economy. Bank of Japan Governor Haruhiko Kuroda said that the slowdown is a natural offshoot of what the Chinese authorities are trying to do: transform the economy from one based on investment and manufacturing into one more focused on consumption and services. According to him, China will succeed in its rebalancing efforts. Christine Lagarde, the IMF's managing director, observed that China's economic transition is a "massive undertaking", but hoped that growth will improve this year to 3.4pc from 3.1pc in 2015. European policymakers also sounded a positive note as worries over Greece have eased a bit. A modest pick-up in EU economic growth has also bolstered confidence that the single currency zone will not break up.
The consensus of opinion among the leaders of the world economy was that the slowdown in China is a natural outcome for an economy in transition. It was noted at the Davos forum that given its size, a growth rate of even 5-6pc a year for China will add substantially to the global GDP. In other words, even a slower-growing China will continue to remain an essential part of the global economy. The sheer size of China and the financial resources at its command are likely to ensure that its economic growth will stabilise at a fairly elevated level in the short to medium term. But this will require that Chine meet head on its deep structural challenges and take steps to get rid of its huge debt burden.