While the world cites a potential unexpected US Federal Reserve’s rate hike, a “Grexit,” or “Brexit” and China’s slowdown as the major risks for the global economy, Standard and Poor’s European Sovereign Ratings Director Frank Gill pinpointed a global savings glut as the key most important risk for the world economy to look out for.
Gill emphasised that the global economy currently faces a shortfall in international investment savings. However, once accompanied by low inflation rates - which are close to zero percent - investment activities begin to decline.
“Excessively high savings in the European countries like Germany… relatively high savings and weak demand in Japan, accompanied by extremely low inflation in most of the world curb confidence that could weigh on investment activity going forward,” stated Gill in describing the current risks.
The S&P Director highlighted that “every country has its specific challenges but overall you're seeing somewhat weak demand,” which weighs down the international growth rate.
Recently, the Central bank of China reduced its benchmark interest rates by 25 basis points to 5.1 percent in order to boost its lethargic economy and stimulate inflation. However, according to Gill, success will be measured through “reforms which will hopefully boost demand in investment in countries like Japan” which suffers from weak consumer spending year-on-year.
Conversely, China is expected to “move gradually towards a more consumption driven economic model” due relatively high investments.
Another risk is the predicted upcoming US Federal Reserve’s rate hike. The growth pace of the global market could be disturbed if the Fed announces its move to raise interest rates unexpectedly. However, such a rate hike now depends on positive economic data and is anticipated earliest in September or by the end of this year. “As far as we can tell there was better employment data out of the US last week,” said Gill, saying that a rate hike is on the table.
Falling oil prices have also affected global markets. In the past year some countries have been affected negatively, while others have benefited from the price drops. Slumping prices did not help in generating inflation in countries with deflationary risks, such as the eurozone or Japan, while conversely oil importing countries like Turkey highly benefited from the fall.
According to Gill, S&P is predicting a two year average for oil prices of $65 per barrel. Brent crude reached 2015 highs last week, although the rally has been interrupted by a supply glut.
However, the S&P director says that since financial inflows into the Turkish economy are coming from the Gulf - major oil exporting countries - higher oil prices may not be terrible news for Turkey.
Standard & Poor’s kept Turkey’s foreign currency sovereign credit ratings at BB+ while maintaining the country's negative economic outlook on Friday.
Evaluating S&P’s rating decision, Gill stated that the Turkish government has a development plan aiming to reduce the country’s “current account deficit by increasing domestic savings, [and reducing] Turkey's net energy import bill” and other methods. Gill stated they will watch the outcomes of the June elections and track what they will mean for policy.