The global economy will grow a meager 2.5% this year, IHS chief economist Nariman Behravesh said on Monday, citing a slowdown in China and a shortening of the supply chain.
Speaking at the 2016 TPM Conference in Long Beach, California, Behravesh warned that it will be two years before trade improves and when it does it won’t be anywhere near the levels seen in the 1990s and 2000s.
“The cyclical drivers of weaker trade growth account for 70 percent of the drop. An extended period of sluggish growth is part of the answer and, particularly, it is the Chinese industrial recession that plays a large part,” he said, according to JOC.com, noting that imports into the Asian country declined 13 percent in 2015. “That is a huge deal in terms of trade growth.”
While China’s shift from an industrial economy towards consumption and services has curbed exports of commodities from other countries, the prices of which have halved in the last two years, Behravesh forecast the situation would turn around.
“We are not going to continue to see these huge plunges in commodity prices,” he said. “If anything, they will start to come up. The drag from China’s industrial sector will begin to ease a little and growth in a lot of economies will begin to ease. By next year, the recession in Brazil and Russia will ease as well.”
However, companies will continue to shorten their supply chains, which in turn will change the structure of global trade, but Behravesh said that’s not necessarily a bad thing.
“We are seeing a lot of producers producing ‘in the market, for the market,’ in China for China,” he said. “The big era of globalization may be behind us.”
One bright spot in the gloomy global economy is the United States, he noted, with consumer spending strong in January, which is driving growth, alongside housing starts, income and job growth and low gas prices.
But while Greece no longer poses a threat to the European Union, political problems triggered by the migrant crisis are causing “thunderclouds on the horizon” of the single currency area. In addition, the risk of a “Brexit” (a British exit from the EU) could have serious repercussions worldwide, though Behravesh said there’s a 20-30 percent chance of that happening.
He’s not the only economist predicting weak growth. The outlook from Moody’s Investors Service has pegged levels around 2.8% in the top 20 world economies in 2015-17, well below the 3.8% prediction recorded in the five years before the global financial crisis.