Global Economy in 2015; Oil, Dollar, and the Tired Train of Growth

As the year 2015 comes to a close, there will be no bright memories left in the economic arena. Weak growth, sluggish international trade and foreign investments, the fatigue of emerging powers, the fall in commodity prices, and the rise of the US dollar were the most significant events that filled the columns of economic media throughout the year. In the second half of the 21st century, it is evident that the global economy is moving further away from the massive financial crisis of 2007 to 2009, but not so quickly that the severe shocks and consequences of that crisis can be entirely forgotten. The tired train of growth is expected to see the global economic growth rate in 2015, based on most forecasts, not exceed three percent, marking the lowest growth rate in the past five years. Among the major industrial nations, the United States leads with a growth rate above 2.5 percent, while the Eurozone will have to cope with a growth rate of 1.5 percent, and Japan's growth rate will fluctuate below one percent. These assessments rely on forecasts from international financial organizations that do not seem far from reality. According to the same evaluations, the average growth rate of emerging powers and developing countries will hover around four percent in 2015. China's official growth rate will drop below seven percent, while India's growth rate will surpass that of the 'Yellow Dragon' for the first time, reaching above seven percent. Meanwhile, Brazil's growth rate is expected to fall to minus three percent, which, if realized, will be the most painful. This country, the seventh-largest economy in the world and the economic giant of South America, has suffered over the past two years from three factors: falling commodity prices, a heavy burden of foreign debt, and a crisis in domestic politics. Many developing countries, especially poor nations in Africa, were severely affected by the continued decline in commodity prices in 2015. Overall, it appears that in the aftermath of the 2007 to 2009 crisis, the global economy still lacks the necessary productivity to achieve a significant leap, similar to the leaps driven by forces that propelled many industrial and emerging economies in the last decades of the 20th century, thanks to the electronics industry, particularly in data processing. However, in various industrial fields, from robot production to biotechnology, waves of continuous innovations and inventions are paving the way for a major technological revolution. But transforming these new technological waves into consumer and commercial leaps, which can serve as driving forces for rapid global economic growth, will take time. Commodity prices: Still on the decline In 2015, as in the previous year, the average price of commodities continued to decline. In fact, the prices of many raw mineral and agricultural materials experienced new and severe drops due to increased supply, decreased demand, or both. The decline in demand, given the slowdown in growth in significant parts of the industrial world (Japan and the Eurozone) along with the slowing economic growth rate in China, is one of the most important factors behind the drop in commodity prices. At the same time, we know that competition among producers of a commodity to expand their export markets increases supply and lowers prices. Among these, the continued fall in oil prices, among other commodities, due to the characteristics of this commodity, was one of the most newsworthy events in 2015. The price of this commodity, which reached $115 per barrel in mid-2014, rapidly decreased in the second half of the previous year, and this decline continued throughout 2015 despite a few short-lived and unsuccessful spikes. The price of the OPEC oil basket fell to $32 per barrel by the end of 2015. Compared to the price of that basket in June 2014, this represents a 70 percent drop, putting many exporting countries' treasuries in a very difficult situation. A combination of factors simultaneously pulled oil prices from their peak downwards. In terms of demand, the economic situation in a large part of the industrial world and emerging powers, as mentioned, does not provide a favorable environment for the consumption of raw materials in general and oil in particular. The slowdown in growth in China, which for a relatively long period acted as a powerful locomotive of demand and significantly raised the prices of raw materials, naturally had a negative impact on oil prices. Energy conservation in fossil fuels (oil, coal, and gas), which is rapidly expanding thanks to technological advancements, has also affected the demand for oil. However, for renewable energies to replace fossil fuels, several more decades are needed unless a significant technological revolution can present existing data. In terms of oil supply, the OPEC organization (in fact, Saudi Arabia) not only did not lower its production ceiling set at 30 million barrels per day in 2011, but also practically sent 1.5 to 2 million barrels per day more than the set ceiling to the market. Iraq's oil production also continued to increase despite its chaotic security situation. Another news that reinforced confidence in the existence of sufficient oil in the market and contributed to the weakening of its price was the approaching time for the lifting of economic sanctions against Iran, which is expected to add 500,000 barrels per day to oil exports. Finally, the announcement of the official return of the United States to global oil export markets, after 40 years, further destabilized oil prices. This is a fundamental shift in the energy economy, the significance of which, due to its obscurity amidst the end-of-year news frenzy, did not receive the attention it deserved from public opinion and international media. It should be noted that after the fourth Arab-Israeli war in 1973 and the oil embargo imposed by Arab countries on the United States, which led to a fourfold increase in the price of 'black gold,' the US Congress decided to halt oil exports to ensure the country's energy security. Today, after four decades, the tables have turned, as from 2008 to the present, thanks to the exploitation of unconventional oil or 'shale,' US oil production has nearly doubled, placing the country on par with Saudi Arabia in this regard. In this context, under pressure from oil lobbies, the US Congress on December 18, 2015, allowed American oil companies to export oil to global markets. It seems that the first oil export shipment from this country, consisting of 600,000 barrels of oil extracted in Texas, will be sent to a refinery in Switzerland in the early days of 2016. Central banks at the helm Once again in 2015, it was shown that central banks in major industrial countries are increasingly participating in steering national and global economies. It is evident that global financial markets primarily react to the statements of Janet Yellen, the chair of the US Federal Reserve, Mario Draghi, the head of the European Central Bank, and their counterparts at the heads of the central banks of Japan, the UK, Switzerland, and others. The noticeable increase in the role of central banks in governing the global economy began in the 1980s and peaked following the financial crisis of 2007 and 2009. To counter the consequences of this crisis, the US Federal Reserve was the first among other central banks to adopt an expansionary monetary policy and implemented it through both 'conventional' and 'unconventional' methods. The 'conventional' method in implementing expansionary policy is lowering interest rates, and we know that the base interest rate of the US Federal Reserve (known as the federal funds rate) was reduced to nearly zero to encourage investment and consumption. The 'unconventional' method was implemented through the policy known as 'Quantitative Easing' (QE). In very simple terms, 'Quantitative Easing' means the large-scale purchase of government bonds from financial institutions (banks, insurance companies, pension funds) by the central bank. In fact, the US Federal Reserve injected hundreds of billions of dollars into the economic arteries using this method each year. About two years ago, the US Federal Reserve concluded that given the relatively acceptable growth rate, improvement in the labor market, and the recovery of stock and housing markets in the country, it should gradually abandon the 'unconventional' method, which is 'Quantitative Easing.' Instead, to move away from the 'conventional' method (low interest rates), the US Federal Reserve acted with extreme caution and repeatedly postponed increases in this indicator, until finally, on December 16 of this year, for the first time in ten years, it changed the target range for the interest rate from 0 to 0.25 to 0.25 to 0.50. This is a very limited increase, but at the same time, it signals to financial markets that from now on, the path is clear for successive increases in interest rates in the US, so that the hard shocks resulting from surprises do not occur. Why did the US Federal Reserve act so cautiously in raising interest rates? The simple reason is that the impact range of this indicator, given the dimensions of the US economy and the role of the dollar, is very broad. Even the smallest fluctuation in US interest rates can affect stock and commodity markets as well as the volume of trade and investment in a very large part of the world. For example, one can point to the impact of US interest rates on international monetary relations. It is known that over the past eighteen months, the strengthening of the dollar against many other international currencies has been one of the significant economic news events globally. This trend continued in 2015, and the advance of the US greenback persisted. With the increase in interest rates in the US and the prospect of further strengthening the dollar, a significant volume of capital is heading towards the United States to benefit from higher interest rates and potential dollar appreciation. These interactions increase the demand for dollars in the monetary market and further bolster the greenback. The continued rise of the dollar in the international monetary market was one of the most important economic events in 2015. At the beginning of this year, one euro was exchanged for $1.20. By December, the value of the euro fell to $1.09, and the possibility that in the near future one euro could be exchanged for one dollar does not seem unlikely. There are even speculators who see the euro at a level lower than the dollar in a few months. One of the factors that makes this scenario plausible is the completely different policies adopted by the central banks of the US and Europe. As mentioned, the US Federal Reserve, considering the relatively favorable economic situation in the country, has abandoned the 'Quantitative Easing' policy and has embarked on the path of raising base interest rates. In other words, the Americans are moving away from monetary expansion to prevent their economic engines from overheating. However, the European Central Bank has just turned to monetary expansion and is implementing the 'Quantitative Easing' policy while keeping interest rates at very low levels. These two different and even contradictory policies are likely to lead to further strengthening of the US greenback against the European single currency. The risks of the duality of monetary policies on either side of the Atlantic should not be overlooked, including that further strengthening of the dollar could damage the competitiveness of US export goods, harming the trade balance of the world's leading economic power.