The global economy in pictures Feb 2016
Time to hit the panic button?
We believe some of the gloom and concerns about the world economy have been overplayed. It is not time to hit the panic button, just yet
IN CASE OF PANIC
FALLING OIL
PRICES
A fall in oil prices led global
equity markets down,
especially in emerging
markets
BREAK GLASS
However, we believe that
lower oil prices generally
lead to strong growth,
albeit with an 18-month lag
UK sterling slides
DEPRECIATION
IN ASIA
US RECESSION
RISK
Whether the yuan continues
to depreciate remains unknown
Fears about US growth have
been driving risk assets lower
However, the Bank of Japan’s
introduction of negative
interest rates can be seen
as a response to the
sharp appreciation
However, we believe:
• Oil prices should boost
consumer spending
• Government spending will
add 0.5% to US GDP in 2016
• Federal Reserve is unlikely
to raise rates in March
Concern over China
UK sterling experienced its largest two-month fall against the US
dollar since the height of global financial crisis in 2008
While much of the
nervousness in
global markets is
stemming from China,
we believe China is
seeing some
stabilisation
Extent and speed of the
depreciation in sterling
has surprised...
Will authorities continue with the existing policy of gradual
depreciation or pursue a more aggressive one-off depreciation?
...although the
direction of travel
has not
One-off
devaluation
Gradual depreciation
Investors now place a
greater probability on
rates falling rather than
rising in 2016
Move in sterling can
be justified by recent
moves in interest rate
differentials (versus
the US)
Schroders’ view
Given that the Brexit risk is becoming more prominent,
and that opinion polls have been narrowing, we
believe there’s further downside risk to sterling
• Large deflationary shock to
global economy
• After a large enough
devaluation, fears concerning
further currency weakness
should dissipate
• This would provide no end
point, volatility and global
deflationary pressures
remain heightened
• Currency could depreciate
more than necessary, leading
to a vicious circle of
global deflation
Both options would adversely affect the rest of the world.
For China in particular, a one-off, large devaluation would
be preferable
Source: Schroders as at February 2016.
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