Global economy to remain in secular stagnation
According to the latest World Economic Outlook report issued by the IMF, the global economy is estimated to have grown 3.1 percent in 2016, lower than the 3.2 percent growth in 2015. In fact, global economic growth has been declining since 2011, dropping from 5.4 percent in 2010 to 3.1 percent in 2016. The average annual growth rate of the global economy from 2011 to 2016 was only 3.5 percent, well below the average growth rate of 4.8 percent from 2002 to 2007. It seems that the global financial crisis has significantly affected the world’s growth trend, which has entered a stage economist Lawrence Summers called “secular stagnation.”
Why does secular stagnation occur? There are two mainstream theories. The first explanation is that the two engines that had driven global economic growth in the past few decades – globalization and financial deepening – have stalled or even reversed course since the US subprime mortgage crisis. As the momentum from old engines subsides and a new technological revolution has not yet started, the global economy is currently in an awkward stage of switching the growth impetus. The second explanation is that the global financial crisis hit global investment hard, leading to an excess of savings and a shortfall of investment. Rebalancing global savings and investment requires a negative real interest rate at the global level, but due to constraints from the nominal interest rate and depressed inflation, there isn’t much room for further downward adjustment to the real interest rate. Global savings are expected to far exceed investment for a long time, pointing to the continuation of the world’s economic downturn.
The overall economic growth of developed countries fell to 1.6 percent in 2016, down from 2.1 percent in 2015. Further, 2017 predictions are not promising, except for the relatively optimistic forecast on US economic growth. Germany, France and Italy will face uncertainty from domestic political elections. Japan’s economic growth may be affected by the yen’s strong performance in 2016, with increasingly narrow room for government stimulus. While Canada’s economic recovery in 2016 mainly benefited from increased energy prices, it seems unlikely this year that energy prices will be as robust as in 2016.
In 2016, the overall economic growth of emerging and developing economies remained steady at 4.1 percent, the same as 2015, but the growth structure has undergone major changes. China, India, economies in central and eastern Europe as well as Latin America and the Caribbean saw growth slowdown in 2016, while Russia, Brazil and economies in the Middle East and North Africa recorded growth rebounds. Most resource- exporting countries saw a growth rebound due in large part to the jump in global commodities prices. Whether they can sustain economic momentum in 2017 will depend on the future outlook for commodity prices. In my opin
ion, global commodity prices are more likely to wander at the current level in 2017. First, the 2016 prices increase was closely related to the rise of China’s cyclical industries, such as real estate and automotive as well as the country’s supply- side reform. With the decline in these industries and the deepening of supply- side reform in 2017, commodity prices may be affected by weaker Chinese demand. Second, the US Federal Reserve will accelerate its pace of rate hikes this year, and the dollar index is expected to remain strong, which will suppress commodity prices. Third, continuous decreases from 2012 to 2015 caused depressions in the value of global commodity prices, which, however, are gone after the rise in 2016.
In addition to the commodities price trend, the growth prospects for emerging and developing economies will be subject to the following factors. First, if the Trump administration starts a trade war, global trade conflicts would be exacerbated, thus affecting export growth for emerging and developing economies. Second, if any black swan incident happens in European elections this year, global financial turmoil would intensify, which would not only push up the prices of safe- haven assets such as the US dollar, but could also expose emerging and developing economies to the aggravated capital outflow and increased pressure from local currency devaluation in the short term. Some fundamentally fragile economies may even face the risk of a financial crisis.
Generally speaking, the global economy may face headwinds in 2017, so the growth rate – which is estimated to rise slightly, reaching 3.3 to 3.4 percent, utmost 3.5 percent – is unlikely to significantly improve. In this sense, the global economy will remain in the shadow of secular stagnation. The author is a senior research fellow with the Institute of World Economics and Politics of the Chinese Academy of Social Sciences. The article was first published on China Forex. bizopinion@ globaltimes. com. cn
Rebalancing global savings and investment requires a negative real interest rate at the global level, but due to constraints from the nominal interest rate and depressed inflation, there isn’t much room for further downward adjustment to the real interest rate.