Poor global out­look won’t af­fect econ­omy

China Daily - - VIEWS - The au­thor is a re­searcher at the In­ter­na­tional Trade and Eco­nomic Co­op­er­a­tion In­sti­tute of the Min­istry of Com­merce.

In terms of real eco­nomic per­for­mance, the year 2018 was “ter­ri­ble” for the world. While it will take some time for the coun­tries to pub­lish their GDP, trade and other eco­nomic data for 2018, some ma­jor economies are ex­pected to main­tain pos­i­tive growth. But the ex­tremely volatile stock mar­kets world­wide can be taken as a “barom­e­ter” of the world econ­omy, and it shows that in­vestors suf­fered huge losses.

Be­sides, the rise in pri­mary com­modi­ties’ prices, rep­re­sented by oil in the first three quar­ters of 2018, has dealt a blow to con­sumers. In par­tic­u­lar, be­cause of the volatil­ity of the stock mar­kets – from China to the US to other ma­jor economies – the to­tal mar­ket value loss last year could reach up to $20 tril­lion.

Stock mar­ket tur­moil to hurt real econ­omy

The FTSE All-World In­dex, which tracks thou­sands of stocks across mar­kets, was down 12 per­cent last year – its worst per­for­mance since the 2008 sub­prime cri­sis which led to the global fi­nan­cial cri­sis – in stark con­trast to the nearly 25 per­cent gain in 2017. The tur­moil in the stock mar­kets has not yet caused the GDP of ma­jor economies to shrink, but given the cen­tral role of fi­nance in the mod­ern eco­nomic sys­tem, a plum­met­ing stock mar­ket will grad­u­ally start hurt­ing the real eco­nomic sec­tor.

Worse, as the world’s two largest economies, China and the United States both saw a dip in their eco­nomic ac­tiv­ity in­dexes in De­cem­ber.

China’s Pur­chas­ing Man­agers’ In­dex for the man­u­fac­tur­ing sec­tor av­er­aged 50.9 per­cent last year, in­di­cat­ing over­all growth of the sec­tor for whole year. How­ever, the PMI fell be­low 50 per­cent, the thresh­old be­tween ex­pan­sion and con­trac­tion, to 49.4 per­cent in De­cem­ber for the first time since July 2016. The US Dal­las Fed Mfg Busi­ness In­dex, which as­sesses the Texas state fac­tory ac­tiv­ity, too, fell to mi­nus 5.1 in De­cem­ber, the big­gest drop since 2013.

Since the com­bined nom­i­nal GDP of the US and China ac­counted for 39.2 per­cent of the world to­tal in 2017 and their con­tri­bu­tion to global eco­nomic growth reached 57.6 per­cent in 2016, the cool­ing of eco­nomic ac­tiv­ity in the two coun­tries at the end of 2018 will in­evitably af­fect other economies around the world.

Bear­ish mid-term out­look for 2019

In the face of cool­ing global trade and fi­nan­cial mar­ket volatil­ity in 2018, es­pe­cially in the sec­ond half of the year, in­ter­na­tional eco­nomic bod­ies and com­mer­cial fi­nan­cial in­sti­tu­tions have suc­ces­sively low­ered their fore­cast for world eco­nomic and trade growth for 2018 and 2019. And their out­look for medium- and long-term eco­nomic de­vel­op­ment is bear­ish. For ex­am­ple, Ja­pan’s No­mura Re­search In­sti­tute said the global econ­omy has en­tered an ir­re­versible down­ward path. In a mid-2018 re­port, the World Bank, too, said the world econ­omy could be in a “dark decade” of low growth and high sys­temic risk start­ing from 2019.

So, is the world econ­omy really headed for a pe­riod of low growth, even re­ces­sion?

The poor global eco­nomic per­for­mance and stock mar­ket volatil­ity in 2018 can be at­trib­uted to some in­trin­sic fac­tors, such as the af­ter­math of quan­ti­ta­tive eas­ing and other ab­nor­mal mon­e­tary poli­cies im­ple­mented by ma­jor cen­tral banks after the sub­prime cri­sis. But the rise of pro­tec­tion­ism and a se­ries of trade dis­putes the US has trig­gered against ma­jor economies, in­clud­ing China, have caused a lot of trou­ble for global trade.

Still, given that the US could suf­fer an­other fi­nan­cial cri­sis and its real eco­nomic sec­tor could again plunge into de­pres­sion, the global eco­nomic and trade out­look for this year is not op­ti­mistic. Es­pe­cially, be­cause de­spite fac­ing a pos­si­ble fi­nan­cial cri­sis, even de­pres­sion, nei­ther the US nor Euro­pean coun­tries, nor emerg­ing mar­ket economies have taken coun­ter­mea­sures. Mak­ing mat­ters worse are some po­lit­i­cal prob­lems that pose a risk to the global econ­omy this year and could even es­ca­late into a cri­sis en­dan­ger­ing peace and sta­bil­ity in the world.

US ac­tions pose a risk to global econ­omy

China and the US have reached a con­sen­sus not to im­pose higher tar­iffs on each other’s im­ports for 90 days pend­ing an out­come in bi­lat­eral trade ne­go­ti­a­tions. But due to the US’ in­creas­ing pro­tec­tion­ist in­cli­na­tion, it is still un­clear whether the two coun­tries can reach a long-term ac­cord and pre­vent a trade war – not least be­cause the US ad­min­is­tra­tion seems hell-bent on vi­o­lat­ing all ex­ist­ing agree­ments. The US is also cre­at­ing trou­ble by re­fus­ing to ap­prove new judges to the World Trade Or­ga­ni­za­tion’s ap­pel­late body after its two judges’ terms ends this year, which risks leav­ing the WTO es­sen­tially par­a­lyzed.

More wor­ry­ingly, some forces in the US are in­tent on push­ing Sino-US re­la­tions to­ward con­fronta­tion. In a speech de­liv­ered at Hud­son In­sti­tute on Oct 4, US Vice-Pres­i­dent Mike Pence ac­cused China of “med­dling in Amer­ica’s democ­racy”, and crit­i­cized China’s “mil­i­ta­riza­tion” of dis­puted ar­eas in the South and East China seas, and its prac­tice of “debt diplo­macy” in de­vel­op­ing coun­tries. Pence’s re­marks re­minded one of the Cold War days.

And on Dec 31, Trump signed a bill pro­posed by some anti-Bei­jing se­na­tors that al­lows the US to sell more arms to Tai­wan and en­cour­age se­nior US of­fi­cials to visit the is­land, cast­ing a shadow on Sino-US re­la­tions as well as the sit­u­a­tion across the Tai­wan Straits.

China has con­sis­tently shown its sin­cer­ity and made max­i­mum ef­forts to avoid the “Thucy­dides trap”. But whether the US will re­spond in kind does not de­pend on China’s ef­forts alone. The world econ­omy faces a gloomy prospect, but that does not mean there is no hope of an up­turn.

Sta­bi­liz­ing role in world econ­omy

First, China’s cen­tral­ized and uni­fied lead­er­ship has been adopt­ing ef­fec­tive mea­sures to sta­bi­lize growth, in or­der to boost the econ­omy and pre­vent it from hit­ting the bot­tom. The past decade has shown that the Chi­nese econ­omy is no longer just the “eco­nomic sta­bi­lizer” of East Asia; it is also a pow­er­ful “en­gine” driv­ing the world econ­omy. Based on the value of the dol­lar in 2015, China’s con­tri­bu­tion to world eco­nomic growth was 41.3 per­cent in 2016, com­pared with 16.3 per­cent of the US and 1.4 per­cent of Ja­pan. Need­less to say, the steady growth of China’s con­tri­bu­tion to global eco­nomic growth has played a sta­bi­liz­ing role in the world econ­omy.

Sec­ond, the nearly 70 years of New China’s his­tory shows the coun­try has the ca­pac­ity to turn a cri­sis into an op­por­tu­nity for fur­ther re­form. In its 40 years of re­form and open­ing-up, China has faced many ex­ter­nal shocks – from the global debt cri­sis in the early 1980s and the 199798 East Asian fi­nan­cial cri­sis to the 2008 global fi­nan­cial cri­sis. And it has turned each one of those crises into an op­por­tu­nity to raise its sta­tus in the in­ter­na­tional eco­nomic sys­tem.

Still, the un­prece­dented chal­lenges fac­ing the global mul­ti­lat­eral trad­ing sys­tem rep­re­sented by the WTO may cre­ate new chal­lenges for China’s eco­nomic de­vel­op­ment. How­ever, a se­ries of pre­emp­tive mea­sures that China has taken, such as the Belt and Road Ini­tia­tive, is ex­pected to off­set the neg­a­tive im­pacts of an ex­ter­nal cri­sis on the Chi­nese econ­omy and, in­stead, pro­mote its fur­ther de­vel­op­ment through closer eco­nomic and in­fra­struc­ture con­nec­tiv­ity with a num­ber of coun­tries across the world.

In its 40 years of re­form and open­ing-up, China has faced many ex­ter­nal shocks – from the global debt cri­sis in the early 1980s and the 1997-98 East Asian fi­nan­cial cri­sis to the 2008 global fi­nan­cial cri­sis. And it has turned each one of those crises into an op­por­tu­nity to raise its sta­tus in the in­ter­na­tional eco­nomic sys­tem.

LI MIN / CHINA DAILY

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