China's GDP growth reaches 25 year nadir

BY Richard Summerfield

As the world’s pre-eminent emerging market, China has been at the forefront of global economic development. It has played a pivotal role in helping to drive growth internationally over the course of the last decade; however, the days of blockbuster expansions appear to be at an end.

Against a backdrop of substantial capital flight, gradually crashing stocks and a sliding yuan, the Chinese economy endured a tumultuous 2015.

News that China's annual gross domestic product growth dropped to 6.9 percent last year, from 7.3 percent in 2014, has only increased concerns around the health of the world’s second largest economy.

Growth in the fourth quarter of 2015 fell to just 6.8 percent. Steel output fell 2.3 percent to 802.8m tonnes, while power generation fell by 0.2 percent. Coal production dropped for the second consecutive year. These declining numbers combined to see China record its lowest period of growth since 1990, according official statistics released on Tuesday.

The data comes during a period of great uncertainty around the Chinese economy, which has had an enormous effect on global markets. However, China’s markets largely cheered the country’s latest GDP figures, noting they were in line with predictions.

While many western economies would welcome news of 6.9 percent GDP growth, for China it represents a backwards step, albeit not a surprising one. The economy has been beset with issues over the last 12 to 18 months. Weakening exports, slowing investment and an overcapacity of both housing stock and factory space have all had a detrimental effect.

All this piles more misery on the Chinese government, which is attempting to reform the nation’s economy. Beijing intends to transition away from a centrally planned, manufacturing economy, embracing a somewhat market driven model more dependent on services and consumption. But this transition looks set to be a painful one.

There are also question marks over the reliability of the data released by the Chinese government,with some analysts suggesting that things may be far worse than Beijing is willing to admit.

To counter the slowdown, Chinese officials have said the government is looking to increase deficit spending in 2016 to generate growth.

News: China's growth hits quarter-century low, raising hopes of more stimulus

Austerity-extending 2016 budget approved by Greek parliament

BY Fraser Tennant

Austerity measures in the billions is the harsh outlook for Greece in 2016 following its parliament’s approval of a budget steeped in spending cuts, pension reforms, tax rises and a less than favourable GDP growth forecast.

The austerity measures, narrowly approved in the Greek parliament by a margin of eight (153 votes to 145), offer up a stringent €5.7bn in spending cuts, encompassing €1.8bn being seized from pensions and €500m from defence. Additionally, the 2016 budget contains tax increases of around €2bn.

Yet despite these measures, Greek debt is still forecast to grow to €327.6bn in 2016.

Furthermore, in terms of gross domestic product (GDP), the government’s budget plan states an expectation of zero GDP growth in 2015 (compared to the 2.3 percent contraction earlier forecast) and the projection of a 0.7 percent drop in GDP (compared to a 1.3 percent contraction prediction). 

“Almost all opposition parties are absorbed with internal issues so the vote process was easy for the government”, observes Dimitris Rapidis, a political analyst and director of the think-tank, Bridging Europe. “The New Democracy party has an upcoming leadership race, the socialists and the communists are out of space, the River party had nothing to offer to the debate, whereas Centrists Union and Golden Dawn are becoming increasingly populist."

Well aware of his government’s need to make good on previous anti-austerity pledges (as well as satisfying the demands of international lenders), prime minister Alexis Tsipras called the 2016 budget, the first to be put before the Greek parliament by the Syriza-led government, “a difficult task for a government that wants to leave its mark with social justice".

Also featuring in the 2016 budget is detail on the three-year €86bn rescue package, in return for which Athens is requested to pass at least 60 'prior action' bills through parliament (including tax hikes and pension reforms), the government’s privatisation of €50bn of national assets to help pay off its debts, and €25bn in new capital that is required to keep the banking system afloat.

A further budget revelation is the admission that Greece is scheduled to be paying off its creditors for the next 42 years, at least.

Looking back, 2015 has been a turbulent year for Greece, with the Syriza government winning national elections in January and September; a much-derided €86bn EU bailout in July; and the country becoming the first ever developed nation to default on the International Monetary Fund (IMF) in June - and all this against a backdrop of a battered economy, immense pressure from international creditors and the continuing spectre of a ‘Grexit.’

On a more positive note, representatives of the eurozone, the European Central Bank and the International Monetary Fund are in Greece this week to continue talks on the pending reforms of the pension and tax systems, as well as public administration issues.

News: Greek parliament approves austere budget for 2016

M&A still the way to go - EY

BY Richard Summerfield

2015 has seen the continuation of considerable volatility and uncertainty in areas of the global economy. Commodities and currencies have remained unpredictable while emerging markets have floundered – China in particular has experienced a notable slowdown this year.

Yet despite these difficulties, companies have remained committed to pursuing M&A deals. 2015 has been a notable year for deal activity, and that appears certain to continue into 2016, according to a new report from EY.

EY’s latest biannual report – the Capital Confidence Barometer – surveyed 1600 senior executives from large multinationals about their global and domestic economic outlook.

The report suggests that companies remain confident about dealmaking in the current global climate, despite some considerable headwinds. Fifty-nine percent expect to pursue acquisitions over the coming 12 months, up from 56 percent of respondents in April’s report. EY believes that the swell in M&A appetite follows the stabilisation of business confidence among top companies.

Notably, many firms are looking to complete deals outside of their typical industry boundaries. According to EY, this strategy toward targeting cross sector deals has been partly driven by changing customer preferences and the impact of innovative disruption.

Cross-border activity is also set to play a key role in shaping M&A activity. As competition for assets and value creation heats up, companies are continuing to look beyond their national borders to target new areas of growth. According to the survey respondents, the eurozone is an increasingly attractive investment location.

“In short, M&A is back as an essential mechanism for generating long-term value. With global macroeconomic growth tempered and their industries perpetually challenged, executives are searching for more than organic growth,” says Pip McCrostie, EY’s global vice chair of transaction advisory services. “In government and global leadership circles, ‘sustainability’ has long been a buzzword for big-picture thinking about the interdependence of nations and resources to support development worldwide. In their way, executives are pursuing their own form of corporate sustainability, reimagining their businesses to both safeguard the last decade’s cost-reduction rigor and build the next decade’s platform for growth."

Report: EY Capital Confidence Barometer, October 2015

IMF slashes growth forecast again

BY Richard Summerfield

In light of increasing gloom in the commodities space, the International Monetary Fund has once again downgraded its forecast for global economic growth.

In its latest half yearly report, the IMF reduced its prediction of global growth to 3.1 percent from the 3.3 percent predicted in July. This marks the weakest global performance since the nadir of the financial crisis in 2009. The IMF also reduced its growth figure for 2016 from 3.8 to 3.6 percent, a further indication of the gathering gloom. It expects growth in China to slow to 6.8 percent this year and 6.3 percent in 2016.

"We see that in the near-term global growth will remain moderate and uneven, and we see higher downside risks than in July," IMF Economic Counsellor Maurice Obstfeld said at a news conference at the commencement of the IMF’s program of autumn meetings in Lima, Peru. "The holy grail of robust and synchronised global expansion remains elusive."

The IMF’s World Economic Outlook report predicts that the US will have the strongest growth of the leading G7 industrial nations in both 2015 and 2016, with 2.6 percent and 2.8 percent respectively. The UK is likely to be the second fastest growing G7 nation, although it will slow from 2.5 to 2.2 percent according to the IMF.

These adjustments have been largely predicated on volatility in the commodities market. With commodity prices weakening – especially over the last month or so – the global economy has suffered, primarily in the emerging markets. China has endured a particularly turbulent few months.

Going forward, the emerging economies will continue to be the hardest hit areas, according to the IMF. They are set to grow by just 4 percent in 2015. "Downside risks to growth for emerging market and developing economies have increased, given the risks to China's growth transition, more protracted commodity market rebalancing, increased foreign exposure of corporate balance sheets and capital flow reversals associated with disruptive asset price shifts", notes the report.

Report: IMF World Economic Outlook

Volatile global markets leave financial services sector in business volume slowdown

BY Fraser Tennant

Volatile global markets are having a marked effect on the financial services sector with business volumes slowing from July to September, according to the latest CBI/PwC Financial Services Survey.

Strong competition is being blamed for the slowdown, with financial services firms taking a big hit on fees & commissions, net interest, investment and trading income.

Despite this impact on income growth, the overall business situation is viewed as stable, with profitability still growing, albeit at a significantly slower rate than that seen in recent years.

The Survey’s key findings include: (i) 25 percent of financial services firms reporting that business volumes were up, while 21 percent said they were down (the slowest rate of growth seen since September 2013); (ii) 24 percent of firms expecting business volumes to increase, while 8 percent believe they will fall; and (iii) 28 percent of financial services firms stating that they felt more optimistic about the overall business situation compared with three months ago, while 26 percent said they felt less optimistic (the lowest rate of growth since September 2012).

“The winds of volatility blowing through global markets have left a clear mark on the financial services sector, impacting business volumes and investment intentions, particularly in investment management and securities trading," said Rain Newton-Smith, director of economics at the CBI.

“Nevertheless, building societies’ business volumes have rebounded, and with financial sector costs under control, profitability is in good shape. At the same time, investment in IT is set to increase as firms aim to improve efficiency.”

Mr Newton-Smith also points out that slower growth in China and other emerging markets has had a knock-on impact on confidence in the world economy, with the Federal Reserve holding off raising interest rates in the United States.

Kevin Burrowes, PwC’s UK financial services leader, added: “Business confidence among banks flat-lined in the quarter leading to September 2015, leaving the sector cautious over its short-term outlook. Recent macro-economic events such as the fall in oil prices, China’s Black Monday, and the ongoing turmoil in global stock markets might have fuelled this sentiment. With interest rates expected to remain on hold, growth for UK banks continues to be challenging.”

Challenging for sure, but the outlook for the financial services sector is encouraging with growth forecast to pick up over the coming months (keeping pace with business volumes in  life insurance, building societies and securities trading), although still well short of the growth levels seen in early 2015.

Report: CBI/PwC Financial Services Survey – September 2015