Five reasons why it might be time to worry about the global economy

Ireland is more exposed than most to external economic shocks...

Five reasons why it might be time to worry about the global economy

Michael Probst / AP / Demonstrators dressed as clowns pass by a burning police car Wednesday, March 18, 2015 in Frankfurt, Germany. Blockupy activists try to blockade the new headquarters of the ECB.

Global markets have calmed somewhat today - but the first (almost) six weeks of 2016 have been massively volatile, with banking shares being the latest victims over the last 24 hours.

So what's been causing these wild swings on world markets?

Big Trouble in (big) China

Throughout the period after the 2008 crash, China's economy continued to boom, while Europe and the US stagnated.

This was fuelled by a property boom and massive manufacturing output. The world's second biggest economy is now transitioning away from manufacturing, and towards services. 

Bill O’ Rahilly, director of Edison Investments in Ireland and a long-standing observer of China’s economy spoke to Breakfast Business:

He says that the country "wants to escape the middle-income trap" - as it looks beyond manufacturing to move away from acting as the "workshop of the world," and invests in technology and green energy.

There is also an air of distrust surrounding China - with some analysts suggesting that authorities in China are covertly depreciating yuan values. If this was found to be true, it would be likely to start a currency war as other countries devalue their currencies.

Eurozone

There are indications that the ECB is considering further cuts to its already historically-low interest rates - investors have been disappointed in recent months as the bank has made conservative attempts to stimulate the bloc, despite officials commitments to use 'any means necessary' to get the European economy back on track.

France's economy has floundered while Italy's recovery has slowed, and German exports have lagged.

There are also fresh fears over the stability of European banks, and their ability to weather economic shocks.

Shares in Deutsche Bank, Germany's largest bank, have dropped by almost 40% so far this year.

The Financial Times reports this morning that Deutsche Bank is considering buying back several billion euros of its senior bond debt in a measure to bolster its capital reserves and to stem the rout on its shares.

Emerging markets

The BRICS nations (apart from India), and the other 'emerging' economies that were meant to become the drivers of world economic growth are stagnating.

Many have been hit by the collapse of oil prices. Most oil-dependent economies draft their budgets based on oil prices staying above a certain level.

As oil prices have crashed to unexpected lows, this has left these economies facing a struggle to keep their heads above water.

Brazil has slipped into recession while Venezuela is expected to default and Russia is also struggling.

Many of these countries also have borrowings in US dollars - meaning that the Fed's decision to raise interest rates in December of last year has made these loans more expensive to repay.

Oil

The global oil supply glut continues and shows no signs of abating.

Disruption in the oil market has implications for banks who are exposed to the oil sector.

The Bank of International Settlements believes that the oil industry had $1.4bn in outstanding bonds in 2014 and that this number has increased.

OPEC, the world's largest oil cartel, has refused to cut production, despite internal dissent from smaller nations, and it seems to be committed to squeezing less efficient producers out of the market - this has already led to a severing of many oil company's profits.

Commodities

Moody's has warned of a spike in defaults from commodity companies (and oil ones too).

It also has warned that there's a $2tn bubble of bonds issued by mining companies, and that a sizeable portion of them are now rated as junk.

Will this affect Ireland?

Low-interest rates and low euro values are engineered to stimulate the European economy have helped Ireland to build its economic recovery.

The country also benefits from falling energy costs.

However, Ireland is not immune to the global picture, more than €10bn has been wiped off the value of Irish shares since the beginning of 2016.

The ISEQ index has fallen by 15% since January 1st.

The publicly-quoted banks in Ireland have suffered, Bank of Ireland lost another 2.75% to close below 25c while Permanent TSB has lost a third of its value since its re-flotation on the stock market last April.