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Global Economic Climate

In recent weeks, there has been a growing number of warning signs that clouds are gathering over the global economy again. Last month, the procurement managers’ index, which comprises results of selective surveys in the industry and service sectors, declined in 29 out of the 42 countries where it is published. At the global level, the indicator has reached a value that corresponds with GDP growth of 2.9%.

Sometimes, a “rule of thumb” is applied, according to which the global economy has fallen into recession when global GDP is growing at a rate of less than 3%. How can this be? The Chinese economy is evidently slowing down, yet no one knows at what rate given the existing doubts as to the trustworthiness of local official statistics. Brazil’s troubles are deeper than originally expected. Russia’s economy is crumbling under the low prices of its two main export commodities: oil and gas. The Eurozone has averted the immediate risk of debt crises; however, its growth is not able to accelerate to pre-crisis levels. The US will not save the global economy or, to be precise, its growth, on its own. 

What are the implications for the Czech economy? Grave. The Czech economy is very open, with export taking up 85% of last year’s GDP and growing each year. This increases the sensitivity of the Czech economy to shocks abroad. According to the procurement managers’ index, the correlation between the Czech Republic and the Eurozone is 90%, which is equal to the correlation between the GDP growth of the two economies. 

The Czech economy is currently benefiting from increased domestic demand – the contribution of foreign trade to the economy’s growth reached positive values only in the last three months. However, given the worsened economic climate abroad, foreign trade may become a substantial hindrance and subsequently also adversely affect the households and companies tied to domestic demand. The last recession showed that domestic demand may rather easily give in to depressive moods. Given the government’s ability to pursue procyclical fiscal policy – that is, the exact opposite of what is needed – and the limited possibilities of the central bank and the zero, at times negative, interest rates, we could but helplessly stand by and watch the “waving occluded front” enter the Czech territory. It is still early to issue gloomy forecasts, yet the economic development beyond our borders deserves extra attention.

David Marek, Chief Economits, Deloitte