US 2015 rate hike hopes waning

Dubai - Emerging market crisis a threat to global economy, but China jitters receding.

Amid gloomier forecasts by leading economists on the brittle state of the global economy, investors across the world are expressing growing scepticism that the US Federal Reserve will raise rates this year.
While fears of a recession in China have receded, more than half of global fund managers expect the Fed to increase rates in December, while a little over third see a rate hike in the first quarter of 2016, a survey by Bank of America Merrill Lynch revealed on Tuesday.
In a note entitled "No pain, no gain," BofA said even though fears of a slowdown in China and an emerging market debt crisis still pose the greatest risks to the financial world, similar to last month, sentiment towards China is improving. In September, 55 per cent of investors considered a Chinese slowdown as the biggest "tail risk", compared with 40 per cent this month.
"As investors debate the timing of a rate hike, they should be anticipating a massive policy shift in the US, Europe and Japan from quantitative easing to fiscal stimulus in 2016," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
The International Monetary Fund  last week again downgraded its outlook for the global economy, putting growth at the slowest rate since the 2008-09 financial crisis. Economists are still counting on emerging economies to step up their game.
"If there's going to be strong growth in the global economy, the engine of growth will be emerging markets," said David Lipton, the IMF's No. 2 official.
For the GCC and other oil exporting countries in the Middle East, the IMF warned that a combination of low oil price and intensifying conflict in the region would impact the growth rate. Speaking ahead of the launch of the IMF's regional economic outlook, the fund's director of the Middle East and Central Asia Masood Ahmed said: "If you look at the growth rate, it is a little short of two per cent for the oil exporters. That is almost one per cent below the number for 2014.
According to the IMF,  the GCC countries are doing better than the others. Their growth rate is about 3.25 per cent this year and will slow down a little bit more next year to just below three per cent as they continue with their process of fiscal adjustment. Masood estimated that export earnings of oil exporting countries in the Middle East and North Africa region fell by $360 billion in 2015 compared to 2014. In May this year, the IMF estimated export earnings of Middle East countries to fall around $380 billion by 2015.  
According to UAE Minister of Economy Sultan bin Saeed Al Mansouri, the UAE economy is on target to grow more than 3.5 per cent to exceed Dh1.6 trillion in 2015 on the back of a vibrant non-oil sector.
A research note by Abu Dhabi Commercial Bank said the UAE is among the best-positioned of the GCC countries to withstand the lower oil price environment due to its comparatively diverse economy and strong forex reserves. "We see headline real GDP growth moderating to 3.7 per cent in 2015 from 4.6 per cent in 2014 and real non-oil GDP growth decelerating to 3.9 per cent from 4.8 per cent," said the bank. Credit Suisse, the world's fourth-largest wealth-management firm, warned on Tuesday that as the overall economic outlook remains weak global household wealth will grow at 6.6 per cent annually, slower than the seven per cent estimated earlier.
Global household wealth, which is estimated to have shrunk 4.7 per cent to $250.1 trillion in the year ended June 30,  is now expected to rise to $345 trillion in the year ending June 2020.  
At the recent IMF annual meeting, top finance officials confronted an increasingly troubling reality as they searched for ways to pull the global economy out of a rut.
"This is a pretty unforgiving environment," said Bank of England Governor Mark Carney. "It's not a strong global economy."
Citigroup's chief economist Willem Buiter has predicted that the global economy faces a period of contraction and declining trade next year as emerging nations struggle with tightening monetary policy.
Buiter predicted that global growth, at the market exchange rate, will fall below two per cent and will lead to rising unemployment in many of the emerging markets, as well as a number of the advanced economies.
- issacjohn@khaleejtimes.com