The last time I was able to kid myself I had a clue about what was happening to the global economy was somewhere around early September 2008, before the financial meltdown of the sub-prime mortgage crisis plunged us all into an almost unprecedented spiral of uncertainty. More than seven years later, I take consolation from the fact that hardly any credible economists today would pretend to have any degree of certainty as to how things will unfold in 2016. But what is clear is that the aviation industry is facing another year of doubt about what will come to pass in just about all the key markets it serves, with much of this uncertainty being driven by factors such as the immeasurable impact of political instability and terrorist violence.
The latest Economic Outlook from the Organization for Economic Cooperation and Development (OECD) could not make this plainer. “A further sharp slowdown in emerging market economies is weighing on global activity and trade,” commented OECD secretary general Angel Gurría when the forecast was published on November 9. “At the same time, subdued investment and productivity growth is checking the momentum of the recovery in the advanced economies.”
Translation: All those emerging markets you were counting on to plug gaps in demand from flattening mature markets, well I wouldn’t hold out much hope of those if I were you. And I wouldn’t go getting your hopes up about what you can expect from the mature markets either.
When the number-crunching stops for 2015, the OECD expects the global economy to have grown by less than 3 percent. “This is the weakest growth since 2009 and well below the long-run average,” reported Gurría. “This largely reflects further weakness in emerging market economies, with recessions in Brazil and Russia and the slowdown in China hitting activity in key trading partners.”
So the message from the OECD is that it’s not just a case of accepting that individual national economies are seeing slowing growth or recession but that the high degree of interconnectivity between markets means that these trends are now denting overall global trade and feeding through into weakening levels of investment in infrastructure and equipment (such as aircraft). “Global trade, which was already growing slowly over the past few years, appears to have stagnated and even declined since late 2014, with the weakness centering increasingly on emerging markets, particularly China,” said the OECD. “This is deeply concerning as robust trade and global growth go hand in hand. In 2015 global trade is expected to grow by a disappointing two percent. Over the past five decades there have been only five other years in which trade growth has been two percent or less, all of which coincided with a marked downturn in global growth.”
In the 34 OECD member states (including most European countries, the U.S. and Australia), business investment in 2015 and through the end of 2016 is expected to rise by 3.3 percent, a rate that the Paris-based organization described as “anemic.” At the same time, it described the availability of credit in many advanced countries as “subpar.”
The OECD members do not include any of the emerging markets that the group’s economists now say are a big cause for concern going into 2016. These emerging markets have been hit by factors such as lower commodity prices and weak export demand. Rising corporate debt levels in these emerging economies are now a further cause for concern because, according to the OECD, “volatile international capital flows could make serving that debt much more difficult.”
The slowdown in annual growth of China’s gross domestic product to an anticipated 6.5 percent in 2016 (from 6.8 percent in 2015) and 6.2 percent in 2017 is already adversely impacting the economies of key trading partners, including Russia, Brazil, Malaysia, the Philippines, South Korea, Mexico, Indonesia, Chile and South Africa. The haziness of the outlook for China is compounded by the serious lack of transparency over economic data on the part of the Chinese government.
In the case of Russia, there is clearly a political dimension to the uncertainty in that at least a part of its dipping GDP growth can be attributed to economic sanctions imposed on it by Western countries in response to the military conflict in eastern Ukraine. The OECD sees Russian GDP growth down by 4 percent in 2015, and a further 0.4 percent in 2016 before, hopefully, rebounding upwards by 1.7 percent in 2017.
Threat of Terrorism Casts Long Shadow
Where politics really starts to make it harder for economic forecasters to feel confident in their projections is in the possible fallout from the rising tide of terrorism (as tragically epitomized by the recent Paris attacks and the destruction of a Russian airliner over the Sinai Desert). Related factors such as the barely controllable exodus of refugees from war-torn Syria could further dent prospects in Europe’s economies.
Further cause for concern of economic destabilization comes from the continuing major military conflicts in Syria, parts of Iraq and Yemen, and the fact that countries such as Egypt, Libya and Algeria are clearly struggling to contain terrorist activity. The more prosperous states of the Arabian Gulf, including Saudi Arabia and the United Arab Emirates, are eager to convey the impression that they are immune to these surrounding threats and for the sake of global trade we have to hope that this belief is well founded.
There are no Nobel Prize-winning economists on the AIN editorial team (at least not yet). In making our assessments of business prospects we rely on professional forecasters as much as anyone else in the aviation industry. But we also are blessed with the opportunity to connect directly with the industry on the international airshow circuit and this provides a vital chance to gauge mood (albeit somewhat subjectively).
Our recent travels in November to the Dubai Airshow and the NBAA Convention in Las Vegas provided a telling contrast as to how executives in the front lines see prospects for the coming year. The mood in Dubai was subdued, with little evidence of rising sales in the Middle East and with some senior executives choosing to stay away from the show. In Las Vegas, where the glass always appears half full even when it’s not, there was a palpable buzz in the air, with strong sales activity and optimism-fueled news of new partnerships and products. Though global in scope, the NBAA show is deeply grounded in the U.S economy, which appears for now to be a key beacon of hope.
The fortunes of business aviation in particular are usually inexorably tied up with those of world stock markets, which have had another roller-coaster year. This is probably reflected in recent specific forecasts issued by companies such as Honeywell, projecting a mixed picture in terms of anticipated medium- and long-term demand.