Global Economies and the Impact of Currency Fluctuations - Part OneGlobal Economies and the Impact of Currency Fluctuations (Part One)

February 2016 – IORMA Research

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As the U.S. economy recovers, the dollar has strengthened, making it one of the best performers over the last year. As explained in our earlier introduction with respect on this issue, currency fluctuations have a huge impact on the economic and social welfare of companies and consumers as global economies are closely connected.

The following explains how other advanced and emerging economies and currencies are faring and their outlook for 2016.

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Brazil

Brazil’s economy has been hit hard by the steep plunge in commodities prices and the economic slowdown in China. The real has tumbled almost 35 per cent against the dollar year to date. The Brazilian economy is the 10th largest economy in the world. During the period 2004-2008, the economy grew at the rate of 4-5%on average. Many would consider these growth rates to be less impressive than rates seen in China and India, but Brazil nevertheless continues to be an investment hotspot. Brazil is one of the few countries in the world that are self-sufficient in oil, which plays a very crucial role in global economy. Brazil is also a leader in alternative energy sources; it produces more ethanol than the combined production of Asia and Europe. Brazil is also the second largest producer of iron ore in the world. According to the OECD the recession is projected to continue into 2016, due to needed fiscal adjustment, tighter monetary policy to contain inflation and a lack of investor confidence related to political uncertainty. A slow recovery is expected to unfold into 2017 as confidence in macroeconomic policies improves. Unemployment is set to increase further in 2016. Although inflation expectations have come down, the return of inflation to the central bank’s target is likely to be delayed by the recent sharp depreciation of the currency.

 

The following table shows some key data[1]

 

2013

2014

2015

2016

Population (thsd)

201,033

202,769

204,451

206,082

GDP USD bn

2,391

2,347

1,800

1,673

Real Growth %

2.7

0.1

-3.0

-1.0

GDP PP p/c USD

16,008

16,155

15,690

15,587

REAL – USD

2.1570

2.3512

3.3360

4.15

 

Russia

The Russian Ruble was hit hard in 2014, losing nearly 40% of its value following economic sanctions by the West and low oil prices.  Near the end of 2015 the Ruble had fallen to 72.47 against the US dollar, its worst exchange rate since December 2014.

Two big things have hurt Russia’s economy: the falling price of oil and economic sanctions. The oil and gas industry generates about half of Russia’s revenue, therefore, when a combination of the shale boom in the U.S. and weaker demand worldwide pushed the price from over $120 per barrel in 2012 to $60 at the end of 2014 and even lower to under $40 in December 2015, Russia got in serious trouble. The sanctions imposed by Europe and the U.S, designed to punish Russia’s companies for President Vladimir Putin’s actions in Ukraine, have hurt, too.  At the beginning of 2016, the ruble saw another episode of strong volatility and near the end of January the Russian currency fell to a new record-low of 82.4 RUB per USD. Global oil prices tumbling to the lowest level in over a decade at the beginning of the year piled more pressure onto the ruble and fuelled further concerns of a deeper-than-expected recession in 2016. Moreover, the Russian currency’s sharp fall has placed the Russian Central Bank’s (Bank Rossii) exchange rate policy under scrutiny again as the ruble’s fresh plunge is likely to spur inflation in the coming months, thus undermining the Bank’s efforts to reduce it.

 

2013

2014

2015

2016

Population (Thsd)

143.300

143.700

146,300

147,000

GDP USD bn

2,079

1,861

1,236

1,179

Real Growth %

1.3

0.6

-3.8

-0.6

GDP PP p/c USD

24,343

24,449

23,744

23,876

Ruble – USD

31.86

38.51

61.19

76.75

 

The European Union

The euro, the common currency of the Eurozone member nations, has seen its value steadily decline due to persistent economic woes, prompting the European Central Bank (ECB) to begin quantitative easing (QE) efforts in order to jump start the economies there. Furthermore, fear of a Greek exit from the euro and the contagion that would cause throughout the peripheral nations has depressed its value.

Scandinavian countries, although not members of the Euro currency, are nonetheless intrinsically linked to European economic activity. Sweden and Norway, in particular, who rely on oil production as a large part of their economy, have seen their currencies fall just under 10% so far this year. Likewise, the British pound has lost similar amounts.

 

Australia

The Australian dollar has depreciated against the US dollar by 20%, 3% against the Euro and 7% against the Japanese Yen. As these are Australian’s trading partners, that is certainly helping exporters by making them more competitive and helping to re-balance the economy. Meanwhile, the oil price is 45% below where it was 12 months ago, with benefits to both industry and households. According to Goldman Sachs, the economic growth will be at just 2%, as it believes, “balancing the transition of economic growth from the non-mining sector then 2016 will likely be worse”2016 is still presenting as a slower year for economic growth relative to 2015. The bank also sees an “unwinding” of the recent employment gains, forecasting the unemployment rate to rise to 6.25%, and inflation remaining around 2%. It sees a recovery of sorts in 2017 and 2018, with GDP growth returning to around 3%.

 

2013

2014

2015

2016

Population

23,295

23,626

24,027

24,445

GDP USD bn

1,497

1,443

1,241

1,253

Real Growth %

2.1

2.7

2.4

2.9

GDP PP p/c USD

45,212

46,550

47,318

48,404

Avg AUD – USD

1.037

1.109

1.332

1.44

 

It is interesting to observe that some of the weakest performers of 2014 did somehow manage to remain fairly stable in 2015. The Japanese Yen, which lost over 16% due to Abenomics, and the Argentina peso, which was down over 10% last year, are only down modestly in 2015. The Swiss Franc, which lost around 12% over the past year, is actually a bit stronger than the dollar due to Switzerland’s controversial decision to de-couple from the euro peg.

 

For more about currency fluctuations and their influence on economies see part two (Coming soon).


[1] source: IMF, US Forex, Federal Reserve and IORMA research and estimates