During the first few months of 2016, risk appetite in global asset markets and international financial conditions turned decisively negative as investors began pricing in much slower global economic growth. Deteriorating fundamental economic data implies a much greater global slowdown may be on the way. Perhaps more unsettling has been the reemergence of challenges to large globally-active banks and increasing policy risk in the developed world.
MIDDLE MARKET INSIGHT: The growing segment of middle market firms operating across borders and subject to regional variation in demand should expect reduced pricing power with some risk to both revenue growth and earnings growth.
In the RSM US year-ahead forecast, we outlined how, on a global basis, there was an increasing risk that growth would slow well below 3 percent due to knock-on effects in emerging-market economies and the oil-producing Middle Eastern and North African (MENA) countries. This risk is directly related to the demand deceleration in China and the collapse in global oil and commodity markets. Theglobal economy is now caught in a growth recession and there is an increasing chance of another round of debt, financial and banking crises that could originate in the heart of Europe or China.
Global growth at the end of 2015 likely decelerated to 2 percent on a year-ago basis, which is consistent with a growth recession. Traditionally, in the developing economies, anything less than 3 percent is a growth recession. Using the 3 percent growth metric, broad swaths of Africa, Latin America, the Middle East and Eastern Europe are caught in a growth recession. Moreover, Asia (excluding Japan) and the entire Asia Pacific only remain out of that category if the direction of growth in China decisively turns for the better.
In our view, there are four key areas that represent the greatest risk to global growth during the next 12 to 18 months.
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