A STRONG US dollar combined with slowing global growth is set to plunge the world into its first outright US dollar recession since 2009, according to an analysis of International Monetary Fund data issued last week.

The IMF cut its global growth forecast for 2015 from 3.5pc in April to 3.1pc in its latest projection. But if world growth is calculated in dollar terms, a more parlous and lopsided picture of global economic health emerges.

“In dollar terms, there is going to be negative global growth this year,” said Michael Power, a strategist at Investec, an asset management firm. He added: “2009 was a contraction in US dollar GDP growth and we estimate that 2015 will show an even greater contraction in US dollar GDP growth.”

In its April forecast for the global economy, IMF statistics suggested that global gross domestic product in nominal US dollar terms would hit $74.5tn this year, a contraction of $2.7tn from 2014. This compares to the $3.3tn US dollar recession in 2009, the steepest since records began in the early 1960s.

The topography of global growth appears lopsided when viewed through a dollar prism

The IMF did not update its nominal GDP forecasts for 2015 yesterday, but its downward revision of global GDP growth coupled with the dollar’s continued strength since April suggests a deepening in the likely dollar-denominated GDP contraction.

The dollar is up 6.8pc against a trade weighted basket of major currencies this year.

The power of the dollar as a means of trade payment, store of value and a reserve asset for the world is such that any strengthening in the greenback will be widely felt.

Emerging market countries, for instance, still buy most of their imports in dollars, meaning that the depreciation of their national currencies against the dollar has pushed up the price of imports and therefore damped consumer demand.

“This dollar strength is one of the main reasons for the slowdown or contraction of imports all over the world,” said Mr Power.

“There just hasn’t been the money around to support the import appetite that emerging markets used to have.”

Capital Economics, a research company, estimates a sharp slump in emerging market trade values this year, with exports falling 13.5pc in dollar terms in July, down from an 8.9pc fall in June.

A Financial Times study of 107 emerging markets found that import volumes fell by an average of 0.5pc for every 1pc a local currency depreciated against the dollar.

The topography of global growth appears lopsided when viewed through a dollar prism. Brazil’s projected 2015 GDP in nominal dollar terms is set to contract 19.1pc, while Russia’s could fall by about 36pc, according to IMF estimates.

The US, China and India, by contrast, are set to post healthy rates of growth.

Published in Dawn, Business & Finance weekly, October 12th, 2015

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