10/02/2015 16:06 AST
Global nominal GDP is likely to contract by about $2.3 trillion in 2015 as a consequence of the US dollar strengthening, heralding far reaching implications across markets, principally for commodity prices, a report said.
It will be the sixth time since 1980 that global nominal GDP contracts in dollar terms and the second biggest contraction since 2009, added the latest Global Economic Weekly released by Bank of America Merrill Lynch (BofAML).
The world is going to be about $2.37 trillion smaller in 2015, representing3.2 per cent of last year’s estimated global GDP. For perspective, that would be as if an economy of the size between Brazil’s and the UK’s would have just disappeared.
“In our calculation, we include the US, the Euro area, Japan, the UK, Australia, Canada and all the emerging markets we cover. Together they totalled $70.9 trillion last year, or 91 per cent of the world output as measured by the International Monetary Fund,” the report said.
Nominal global GDP will contract by $2.3 trillion versus 2014, which is quite unusual based on historical standards.
“According to our forecasts, the US is the only country and Emerging Asia the only region where nominal GDP in dollar terms will expand this year. There are some downside risks for Asia, though. We do not expect a meaningful CNY devaluation, but our currency strategists see it as a major tail risk for the global economy,” noted BoFML.
Global nominal GDP has contracted in only five years since 1981 and in three of those years by less than 1 per cent. It has taken major events such as the 1982 debt crisis (-2.3 per cent) and the 2008/09 Great Recession (-4.6 per cent) to bring nominal global GDP contractions of the size likely in 2015.
In normal times, nominal global GDP expands significantly every year. Average nominal global GDP growth has been 6 per cent since 1981. China’s accession to the World Trade Organization, faster EM growth rates and appreciation of their currencies against the USD have brought average growth up to 6.6 per cent since 2002.
The US dollar strengthening has important implications for the global economy, the most direct of which is on commodity prices. Such a broad-based decline in commodity prices shows that there are common macroeconomic factors at play.
The recent oil price plunge has brought significant debate about whether it was sparked due to changes in supply or due to lacklustre global demand. Although both sides of the story have merits, we are forecasting real global growth to accelerate this year. In addition, most other commodity prices, including iron ore, copper and sugar have dropped significantly in recent months.
According to Harvard professor Jeffrey Frankel, the common factor driving commodity prices down is monetary policy. More precisely, Frankel argues that the expectation of higher rates in the US is behind these moves.
The same factor that is taking $2.3 trillion from global nominal GDP is involved in bringing commodity prices down.
In fact, the correlation of nominal global GDP growth and the yearly change in oil and copper prices since 1981 is 29 per cent and 59 per cent, respectively. From 2000 on, these correlations increase to 67 per cent and 65 per cent.
Global real GDP growth has been quite similar since 2000 compared to the 1980-2013 period, so this may not be the explanation, although the different growth composition – with China’s surge – may have helped.
A second implication is that the US economy will become more important again, a consequence of the stronger US dollar.
“In our numbers, the US share of the global economy hit a low of 23.5 per cent in 2011 and has stayed near those levels since then. In the past, fluctuations in the USD brought in 10pp swings in this share. We now expect the US economy to increase its share to 27 per cent of the global economy by 2016,” BofAML said in the report.
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