MHI Solutions

Economic Market Update

The Outlook for the Economy, Material Handling and the Election

shutterstock_420438019Hold on to your hats, because 2017 is likely to be a bumpy ride because of slowing global growth, Brexit fallout, oil and gas credit risks and election cyclicality!

Lower global growth expectations

Back in July, the International Monetary Fund (IMF) lowered its global 2016 and 2017 growth forecasts in response to Brexit concerns, which also sent the dollar higher as a safe haven. At the same time that Brexit concerns were elevated, oil prices started falling when summer oil contract trading ended on the New York Mercantile Exchange (NYMEX), introducing additional credit risks for oil and gas companies. Since the summer, we have seen high volatility across some financial markets trying to reconcile global growth risks with the domestic economic situation.

Global growth and monetary policy

Global growth was at 3.1 percent in 2015—the slowest pace since the Great Recession. Then, in July, the IMF lowered the 2016 global growth forecast to 3.1 percent. Unfortunately, IMF forecasts are usually high, and I believe they are likely to be revised lower in the October 2016 IMF forecast update. We had been expecting global growth in 2016 would be slower than in 2015, which was partially confirmed by IMF warnings from April 2016 and the downgrade of the 2016 global growth forecast in July.

Since slow growth remains a risk, we expect most foreign central banks will remain highly accommodative throughout most of 2016 and into 2017. The Fed, however, is in a tough position, since the Federal Open Market Committee (FOMC) has been talking about Fed policy raising rates for some time. Whenever the prospects of higher Fed rates increase, the dollar strengthens, imports rise and foreign goods become cheaper, which hurts U.S. exports, U.S. manufacturing, and domestically-produced material handling equipment sales. If the Fed does not turn dovish, its hawkish monetary policy stance—in a world of monetary policy doves—threatens to send the dollar higher and slow growth anyway, forcing the Fed to join the flock of doves.

By Jason Schenker, Prestige Economics, LLC

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