The four threats and four opportunities of current global economy
Hongcai Xu
One: the general opinion on current world economy
In general, the current global economic growth has declined slightly. But I think it is impossible for the global economy to slide toward the second dip. The economic power of developed countries is becoming weaker, while economic growth potential in developing countries is more significant. Over the next two or three years, the GDP growth rate of emerging economy will keep more than 6% which is leading the resurgence of global economy. However, it should be noted that the enormous global imbalances, the rising trade protectionism, the depressed private sector, and the more strict rules on financial institution will definitely slow down the global economy recovery. There are a few aspects we should pay attention on.
First of all, the US economy is facing downside risks. Recently Obama government has promulgated the fiscal plan of 350 billion US dollars to stimulate economy through expenditures on infrastructure, R&D and tax reduction. While in the first quarter of this year, the US economic growth was 3.7%, this number dropped to 1.6% in the second quarter, and the real estate market is still in trouble. The Chicago PMI has declined from 63.2 in July to 56.7 in August. The major problems of the US economy are high unemployment, high twin deficits and high loan consumption.
Secondly, the economy of Euro Union has recovered. Comparing with the growth rate of 1.9% in the first quarter, this number reached 1.0% in the second quarter, which surpassed the growth rate of Japan. The economic growth has been driven by recovered local demand and persistent low interest rate of 1% set by EU central bank. Nevertheless there are potential risks endangering economic recovery inside the EU. There are significant economic problems in EU, such as the incoordination between the unifying monetary policy and autonomous fiscal policies, the lack of unifying financial supervision, and high sovereign debt levels.
Thirdly, The Japanese economy is still stagnant with the growth rate of 0.4% in the second quarter. The Japanese government has just announced a new economic stimulating plan to respond to the risks of the Japanese yen appreciation. Japanese central bank is about to maintain easy monetary policy, and get ready to intervene in foreign exchange market to keep the yen from appreciation. The main troubles of the Japanese economy lie in the sluggish domestic demand, declining and aging population, high rate of unemployment, huge national debt and currency appreciation that will damage exports.
Fourthly, the developing countries have become the engine of global economic growth. However, the contraction of external market has forced the developing countries to restructure. East Asian export-oriented countries are difficult to find new sources of growth substituting exports within a short period. The current account surplus of oil-exporting countries will be substantially reduced. In addition, the central bank of Western countries have injected substantial funds into financial market which has caused pressures of inflation and asset bubbles in emerging economies, and there is little space for implementation of monetary policies.
Two: The situation of recent Chinese macroeconomy
In the first half of 2010, China’s economy has maintained high growth with low and stable inflation. The GDP growth rate reached 11.1% and CPI only rose by 2.6% year. The annual growth rate and inflation are estimated to be 9.5% and 3% or less respectively. However, there are a few short-run and long-run structural dilemmas.
First is that there is little space for the expansion of fiscal policy. In 2010, China’s budget deficits have surpassed 1000 billion Chinese yuan and the proportion of deficit to GDP has been around 3%. The expansion of fiscal policy has been limited, and the effects of fiscal stimulating plan have become weaker.
The second is the growth of asset bubbles. The easy monetary policy has led to real estate bubbles that are threatening social and economic stability. However, once the real estate market suffers a hard landing, the quality of Chinese banking assets will deteriorate. If the liquidity flows to the real economy, high inflation will inevitably take place.
The third is the rising difficulty of adjusting economic development pattern. At present, the main tasks of adjusting economic development pattern are expanding domestic demand, boosting consumption, promoting the modern service sector, and accelerating technology progress. However, the fact of low urbanization, poor social security system, and insufficient supply of public goods is difficult to change in the short term.
The fourth is the great income inequality. Currently, China’s income disparity is still increasing. Due to the lack of social security and public services, the income inequality that deeply hurts poor people has become more serious.
The fifth is the low level of economic development. China has become the second largest economy in the world, and has owned the largest amount of foreign exchange reserves. However, China's GDP per capita is less than 4000 US$. Chinas’ huge foreign reserves are based on low wage, high energy consumption, high pollution and high waste of resources over a long period.
Three: the four threats that world economic recovery face in
Dr. Xu: I think there are four threats of economic recovery.
Firstly, the macroeconomic policy caught in dilemma. There is little space for fiscal policy due both to high national debt resulted from the stimulating plan in the 2008 financial crisis, and to the enormous size of balance sheet of the Fed and the European Central Bank. Many countries have to cut public expenditures and implement the fiscal austerity plan to deal with the financial pressure. Moreover, because of the money injected to the financial system did not flow to enterprises, the risks of property and financial bubbles are increasing.
Secondly, the current US dollar-dominated international monetary system has led to the global economic imbalances. The USD alone does not only fail to resolve the “Triffin dilemma”, but also causes cyclical depreciation of USD and current account deficits. The United States has a unique “wealth-generating mechanism” in the world, but it has become a well-known “problem-generating mechanism”.
Thirdly, the higher proportion of capital required for commercial banks could affect the world economy and the banking industry. Recently, the Basel Committee has announced the Basel Accord Ⅲ that aims to strengthen the banking system through higher capital requirement for the banking sector. The agreement provides that by January 1st of 2015, commercial banks are required to raise the capital adequacy ratio from 4% to 6%. The proportion of the “core” capital composed of common shares to banking risk assets is required to rise from 2% to 4.5%. This is the largest financial reform over the last few decades designed for banks to reduce highly risky business and to ensure the health and stability of the banking sector.
Fourthly, the current world trade protectionism impedes the free movement of goods and the development of economic globalization. Free trade will usually be a strong driving force of global economic recovery during the economic crisis. However, based on the World Trade Organization 2009 Bulletin, the number of non-tariff barriers has risen by 17%, from 1272 in 2008 to 1489 in 2009. As the international financial crisis spreads and deepens, trade protectionism is becoming increasingly serious. In addition, some countries have depreciated their currencies to boost exports, and other countries have asked them for currency revaluation through political pressure. I think this is also a kind of protectionist practices.
Four：The opportunity of global economy
Dr. Xu：There are four developing opportunities for the current world economy.
First of all, the current world economy has got rid of negative impact of the global financial crisis. Comparing with most developed economies that have experienced a slight recovery, developing countries have achieved relatively faster economic growth. The emerging economies become the engine of the global economic development.
Secondly, international trade and foreign direct investment have been rapidly recovered. In particular, international trade has presented faster growth, with rising trade prices and larger amount of foreign direct investment in 2010.
Thirdly, financial control and risk management have been strengthened. On 21st July 2010, US President Barack Obama launched the 2010 Wall Street reform and Consumer Protection Act, with two central ideas of systemic financial risk control and financial consumer protection. EU plans to establish three authorities in 2011, responsible for supervising banks, financial transactions and insurance risks. Systemic Risk Management Board is about to be established as well to supervise systemic financial risks.
Finally, the reform of global economic governance has been launched and the G20 has become an important platform for international economic coordination. The G20 has a broader scale of members, with the participant of China, India, Brazil and some other countries, comparing with the G-7. There are three major problems within the current global governance structure. Firstly, there is no enough voice from the emerging economies which is incompatible with their increasing international economic positions and influences. The second is the unbalanced global distribution of benefits. Thirdly, regarding the global climate change issues, disagreements exist between the developing and developed countries.