Con­cerns fol­low good eco­nomic signs

China Daily (Latin America Weekly) - - Views -

This time a year ago, the world econ­omy seemed to be get­ting on a bet­ter plane. A num­ber of cycli­cal in­di­ca­tors sug­gested the world econ­omy would grow about 4 per­cent in the lat­ter half of 2017, rais­ing hopes that it would al­low a multi-year end to the decade of 4 per­cent growth. These in­di­ca­tors in­cluded the Repub­lic of Korea’s ex­ports, the first coun­try to re­port trade ev­ery month, which for the whole year re­ported the fastest rise it has ever had in ex­ports.

Many coun­tries were re­port­ing ac­cel­er­at­ing monthly busi­ness con­fi­dence sur­veys, as shown for ex­am­ple, by the Pur­chas­ing Man­agers In­dex, while some par­tic­u­larly trou­bled economies from ear­lier in the decade, such as the eu­ro­zone, were show­ing es­pe­cially en­cour­ag­ing signs. And at its an­nual meet­ing last year, the In­ter­na­tional Mon­e­tary Fund re­vised up its world GDP es­ti­mate, some­thing that con­tin­ued in its spring meet­ing this year.

A fa­mil­iar trend makes come back

Now one year later, an only too fa­mil­iar trend of this decade has re­turned and at its re­cent meet­ings, the IMF has re­vised down its fore­casts for 2018 and 2019. Those same cycli­cal in­di­ca­tors I re­ferred to, with the slight ex­cep­tion of the United States, are all turn­ing lower. The monthly Ger­man IFO in­dex for ex­am­ple, a very use­ful barom­e­ter of both Ger­man and the eu­ro­zone busi­ness ac­tiv­ity, has turned lower for a num­ber of months, as have most eu­ro­zone PMI sur­veys.

The ROK ex­port data have gen­er­ally trended softer as the year has pro­gressed, and a num­ber of coun­tries have ex­hib­ited wor­ry­ing signs, rang­ing from Ar­gentina to Turkey. China, too, has shown plenty of cycli­cal weak­ness — even with­out the trade spat with the US. The US has been en­joy­ing a cycli­cally strong 2018 so far, but I share the views of many that much of this has been purely due to the large fis­cal stim­u­lus that US Pres­i­dent Don­ald Trump in­tro­duced and it will fade into 2019.

There are also some spe­cific pol­icy is­sues that have grown.

In Eu­rope, we have some very pe­cu­liar po­lit­i­cal devel­op­ments break­ing out, the lat­est be­ing the ap­par­ent de­cline of the two ma­jor cen­trist po­lit­i­cal par­ties in Ger­many, the Chris­tian Demo­cratic Union and So­cial­ist Demo­cratic Party of Ger­many. Which led to the news that Ger­man Chan­cel­lor An­gela Merkel would step down in 2021 — but it turned out she is step­ping down as head of the CDU. This has po­ten­tially im­por­tant im­pli­ca­tions given how sta­ble the Ger­man po­lit­i­cal scene has been for years.

A wor­ry­ing sign hangs over Eu­rope

Be­sides, a stand­off has de­vel­oped be­tween the Ital­ian pop­ulist gov­ern­ment and the Euro­pean Union over Italy’s un­con­ven­tional fis­cal plans. Italy does need poli­cies to help it achieve stronger nom­i­nal GDP growth, not least be­cause there is no way it can re­duce its debt ra­tio with­out stronger nom­i­nal growth. But it can­not openly flout agreed EU rules, as that would de­stroy the cen­tral premise of the EU eco­nomic pol­icy. Of course, given the coun­try’s debt, nei­ther Italy nor the EU can af­ford any­thing close to the cri­sis that Greece en­dured. This is a wor­ry­ing sign that hangs over the EU on top of the cycli­cal weak­ness.

We also have the usual con­se­quences of a tight­en­ing US mon­e­tary pol­icy and the usual dilem­mas this al­ways seems to bring for global fi­nan­cial mar­kets, es­pe­cially those mas­sively de­pen­dent on the role of the dol­lar. Coun­tries with large ex­ter­nal cur­rent ac­count deficits such as Turkey, and a num­ber of oth­ers, of­ten re­quir­ing to re­fi­nance dol­lar-de­nom­i­nated debt at a time of ris­ing US in­ter­est rates and weak­en­ing lo­cal cur­ren­cies, will face con­sid­er­able un­cer­tain­ties.

An odd­ity of this sit­u­a­tion is that this re­peat­edly oc­curs even though the US econ­omy is not as im­por­tant to the rest of the world as it is to global fi­nan­cial mar­kets. This is a struc­tural weak­ness of the global fi­nan­cial sys­tem and, in the ul­ti­mate anal­y­sis, not help­ful for the US econ­omy. The US ex­ports more to many of these coun­tries than it once did, and any weak­ness over­seas will feed back into the US, which means — in my view — 2019 doesn’t look great for the US econ­omy.

US has com­pounded world’s prob­lems

This is com­pounded by the style of the US trade dis­pute that Trump has cho­sen to take to China. Nearly 85 per­cent of all global nom­i­nal GDP this decade has come from the two coun­tries, so a gen­uine per­sis­tent trade dis­pute be­tween them, al­most by def­i­ni­tion, would be neg­a­tive for both in par­tic­u­lar, and the world in gen­eral. One can only hope Trump will agree a deal with China, rather than take even more ex­treme steps. After all, the iconic US com­pany Ap­ple, just as one ex­am­ple, sells as many ex­pen­sive iPhones to Chi­nese con­sumers as it does to US con­sumers.

But even with­out this trade prob­lem, China was fac­ing some se­ri­ous fresh chal­lenges. It ap­peared to de­lib­er­ately ac­cept a lower path of eco­nomic growth in or­der to con­quer some of the do­mes­tic cor­po­rate and lo­cal re­gional debt bur­den, but it hadn’t bar­gained for this trade chal­lenge from the US, com­pounded by the ris­ing dol­lar — with many other coun­tries fac­ing the same chal­lenges of dol­lar-de­nom­i­nated debt. China will need to con­sider more do­mes­tic fis­cal stim­u­lus, es­pe­cially for its con­sumers, and give some con­ces­sions on trade, es­pe­cially those that may have some jus­ti­fi­ca­tion.

There­fore, the G20 Sum­mit in Buenos Aires this week­end may turn out to be more im­por­tant than many of us con­ceived it to be even a few months ago. I hope the spirit of 2008 co­op­er­a­tion can be pur­sued 10 years later.

The au­thor is chair of Chatham House. The au­thor con­trib­uted this ar­ti­cle to China Watch, a think tank pow­ered by China Daily.

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