The IMF released their updated World Economic Outlook this week. The report offered the following analysis of the macro-economic environment:

In advanced economies, a modest and uneven recovery is expected to continue, with a gradual further narrowing of output gaps. The picture for emerging market and developing economies is diverse but in many cases challenging. The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in 2016–17. The projected pickup in growth in the next two years—despite the ongoing slowdown in China—primarily reflects forecasts of a gradual improvement of growth rates in countries currently in economic distress, notably Brazil, Russia, and some countries in the Middle East, though even this projected partial recovery could be frustrated by new economic or political shocks.

The report highlights the now commonplace argument that China’s economic rebalancing and subsequent slowdown is slowly seeping into developing economies, negatively impacting global growth.This is occurring as advanced economies continue to grow very slowly.And any rebound is likely to be subdued at best.More importantly, the IMF sees the following risks to growth:

1. A sharper-than-expected slowdown along China’s needed transition to more balanced growth, with more international spillovers through trade, commodity prices, and confidence, with attendant effects on global financial markets and currency valuations.

2. Adverse corporate balance sheet effects and funding challenges related to potential further dollar appreciation and tighter global financing conditions as the United States exits from extraordinarily accommodative monetary policy.

3. A sudden rise in global risk aversion, regardless of the trigger, leading to sharp further depreciations and possible financial strains in vulnerable emerging market economies. Indeed, in an environment of higher risk aversion and market volatility, even idiosyncratic shocks in a relatively large emerging market or developing economy could generate broader contagion effects.

4. An escalation of ongoing geopolitical tensions in a number of regions affecting confidence and disrupting global trade, financial, and tourism flows.   

I believe point number two represents the largest potential risk.Not only are oil and natural resource companies facing extreme financing pressure from low commodity prices, but so are companies in developing countries who issued large amounts of debt in U.S. dollars.Some have been negatively squeezed as their respective home country currencies declined versus the dollar.That pressure may have dissipated for now with the Fed potentially on the sidelines for the next few meetings.But even a possible U.S. rate increase could exacerbate the dollar/home country spread, increasing the burden on some companies. 

The Bank of England maintained their current rate policy.Their announcement observed that the international environment had settled down; fears of slowing Chinese growth had dissipated and risk taking had returned. They projected another weak quarter for U.S. growth.The bank reported that UK economy was in decent shape, but the upcoming “Brexit” vote had lowered sentiment and chilled large investment activities.Recent Markit reports made the same observation.The ONS issued their monthly report on prices: core producer prices are still fluctuating around 0% Y/Y while total PPI remains weaker (-.9%):

Although consumer prices are still weak (.5% Y/Y), they recently moved slightly higher:

They are still far below the banks 2% inflation target.However, they are at least moving in the right direction. 

EU economic news was disappointing.Y/Y inflation remains low (top chart) with price increases and decreases evenly distributed across EU countries (bottom chart):

Energy prices are the primary reason for low inflation; non-energy readings are approximately 1%:

And while still in a longer-term uptrend, industrial production decreased .8% M/M:

Production in 4/5 sectors declined in the month.

The Bank of Japan’s Yataka Harada gave a speech on Monday that contained several important points. First, he explained how the BOJ applies its negative interest rate policy. The bank divides bank reserves into three categories: a basic balance, a macro add-on balance and policy rate balance. Negative rates only apply to the policy add-on balance, which currently totals 20 trillion yen. This is far lower than the 210 trillion yen balance of the combined total of the other two accounts. Next, he discussed a conundrum regarding the Japanese economy: personal consumption is weak despite a low unemployment and higher wages. He offered two explanations.First, the propensity to save increases as the population ages. Recent research confirms this statement.Second, he argued the negative shock from 2014’s consumption tax increase was still rippling through the economy. This is a less satisfying answer; the tax increase occurred in the 1Q. Had he offered this argument in the 2Q, it would have made far more sense. Finally, METI released the revised industrial production figure for February, which showed a sharp 5.2% M/M drop:

The Bank of Canada maintained their current .5% interest rate policy. Their statement contained the following two key paragraphs:

Governing Council judged that the combination of slower global and US growth, a new round of cuts to investment in Canada’s energy sector, and a stronger Canadian dollar would have meant a lower projected growth profile for the Canadian economy than we had in January. I know this sounds contrary to what you have heard lately, because a range of monthly economic indicators have started the year strongly. Some of this strength represents a catch-up after temporary weakness in the fourth quarter, and some of it reflects temporary factors that will unwind in the second quarter. We think it is best to look through that variability, and note that the economy appears to be achieving average growth of close to 2 per cent in the first half of the year, which is encouraging.

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Specifically, the collapse in investment in the commodity sector will mean a slowdown in the economy’s potential growth rate. In the near term, we’ve lowered potential output growth from 1.8 per cent to 1.5 per cent. You can find details in a staff analytical note we published today. Later this year, the natural sequence of higher non-resource exports and a tightening of capacity constraints should lead to higher investment and employment in the non-resource economy, and therefore growing capacity. Looking beyond the projection horizon, growth in potential output overall should pick up again. This newly-added capacity may give the economy some additional room for non-inflationary growth beyond what we are assuming today.

The commodity slowdown hit the Canadian economy hard, causing a technical recession in 1H15. The economy has grown since then, but the environment is still very challenging.Thankfully, the new government has initiated a fiscal stimulus plan, which should help to minimize the damage.

The only news from Australia was a .1% drop in the unemployment rate to 5.7%.This continued the year-long downward trend in this statistic:

And finally, we have the news from China, where all the reports created the impression of a stabilizing economy.Y/Y GDP growth printed at 6.7% which in line with analyst’s expectations: 

Industrial production rose 10.8%, which tied the highest print in the last 12 months. Retail sales grew 10.5% while fixed asset investment increased 10.7%.For an economy whose performance over the last 6 months has raised global concern, Friday’s slew of numbers provided a fair amount of relief. 

Friday’s news from China was the best news of the week. It indicated their economy has at least stabilized for now. The worst news came from Japan, where the signs continued to point to a weakening economy. Right now it appears “Abenomics” is running out of steam with few new policy ideas on the table to help get the economy growing again. The other news was mixed, with a slightly negative bias. Overall, it appears the IMF’s assessment is correct.