World Economic Landscape in 2019: Down a Track of Medium and Low Speed Growth

The year 2019 has witnessed the drastic slowdown of global economic and trade growth, steep decline of foreign direct investment, continuing slowdown of growth rate of major developed economies and increasing downward pressure on emerging economies. The unilateral and protectionist policies adopted by the Trump administration of the United States have led the world on a track of slower growth; in the meantime, monetary and fiscal policies designed by various countries, especially developed economies, have become less effective; and insufficient global aggregate demand has also severely jeopardized world economic growth. Upon such background, by introducing quantitative easing policies, reducing interest rates and expanding government spending, major economies have taken appropriate measures to prevent a global recession. Looking into the future, adoption of negative interest rate policies by more countries, lack of confidence in international financial markets and investment, and social unrest in certain countries will keep the world economy on a track of medium and low speed growth in the years ahead.

Main Features of World Economic Landscape in 2019 1. Continuing slowdown of world economic growth

In 2017, three quarters of the world’s economies were in a synchronized upswing and today, 90% of them are in synch of decelerating. According to the World Economic Outlook report released by the International Monetary Fund (IMF) in October 2019, the global growth forecast for 2019 was lowered from 3.7% to 3%. Global GDP tracker released by Bloomberg shows that the pace of expansion has slowed to 2.2% in the third quarter of 2019, down from 4.7% at the start of 2018. Among the world’s major economies, growth forecast of the United States (U.S.) economy is down from 3.0% to 2.3%, that of the European Union (EU) from 1.8% to 1.6%, that of China from 6.6% to 6%, and that of Latin America and the Caribbean from 1.0% to 0.2%. In 2019, the world economy is still “in the shadow of a downward trend”, sliding at a much faster pace than expected.

2. Job market maintains steady growth and keeps improving

According to the World Employment and Social Outlook-Trends 2019 published by the International Labour Organization (ILO), the global unemployment rate is expected to be 4.9% for 2019, down by 0.1% from the level of 2018, and will remain at 4.9% in 2020. Overall, major developed economies have seen sound performance in the job markets. In October 2019, the unemployment rate was 3.7% in the U.S., 7.5% in the Eurozone and a year-round low level of 2% to 2.5% in Japan. In major emerging economies, the surveyed urban unemployment rate in China remained stable at about 5.2% throughout the year, falling within the target range. In October 2019, India’s unemployment rate rose to 8.5%, reaching a peak since August 2016 and 3.5% higher than the global average, which was a result of declining economic growth. It is worth noting that although the unemployment rate in the U.S. is at a historical low and its labor force participation rate has increased steadily by 2% in the past two years, its unemployment rate at 3.7%, below the natural unemployment rate of 4%, all the figures may indicate that human capital that should have engaged in education have entered the job market instead and thus may harm the long-term economic growth.

3. Price level in major economies remains generally stable and keeps falling

In 2019, the consumer price index (CPI) of developed economies remained below 2%, with that of the U.S. at 1.8%, the Eurozone at 1.2% and Japan at 0.9%, still moving on the edge of deflation. China’s CPI rose due to price hikes of pork, but its annually average CPI of 2.7% remains manageable. Price level in India has increased by 3.4% annually and reached 4.6% in October, the high

est level among the BRICS. In 2019, the international commodity price index (at 100 in 2015) was 111.2, up by 9.4 points compared with the same period in 2018. To be more specific, Brent oil price climbed slightly by 5.3% by the end of the year, but fluctuated wildly during this period. In mid-September, after attacks on Saudi oil facilities, it cut its daily oil output by 6 million barrels, triggering the most severe interruption in the oil supply in history. Oil prices once soared to USD$ 75 a barrel and later plunged to USD$ 64 a barrel by the end of November. On December 6th, OPEC and non-OPEC oil producers agreed on output cuts. Unless violent geopolitical conflicts occur or shale oil and gas production falls beyond expectations in the U.S., global oil prices are expected to remain stable. It is worth mentioning that upon the backdrop of global economic slowdown, the global financial market put on brilliant performance in 2019 and the global stock index soared. The international gold price also went up steadily, with an increase of 20.3% compared with the same period in 2018, showing the fact that both risk assets and safe-haven assets embraced rising prices. The synchronized rise is a result of the rebound of major risk assets in 2019 after a sharp fall in 2018 and the favorable impacts of central banks’ easy monetary policies.

4. Lackluster performance of international trade and investment growth

In 2019, global trade and investment is less essential in its role as a pillar of global economic growth. In October 2019, the World Trade Organization (WTO) once again downgraded its growth forecast of international trade in goods from 2.4% to 1.2%, and lowered its growth forecast of global trade from 3.4% to 3% for 2020. The world economy continued to outpace the global trade in 2019. According to data released by the Global Trade Alert at the University of St.Gallen in Switzerland, as of October 2019, protectionist measures had reached the same level as those in the whole year of 2018. Yet, only 270 trade and investment promotion measures had been introduced, a considerable reduction in comparison to 352 measures introduced during the same period in 2018. Such decline is particularly rapid in emerging market economies. Trade promotion policies and measures were reduced from 50 to 30 in Brazil, from 29 to 15 in India and from 32 to 1 in Indonesia. Global investment was similarly lackluster. Foreign direct investment (FDI) plummeted worldwide in 2019. According to FDI in Figures report published by the Organization for Economic Co-operation and Development (OECD) on October 28th, 2019, global FDI flows decreased by 20% in the first half of 2019 to USD$ 572 billion. They dropped by 5% in the first quarter and by 42% in the second quarter. Inflows to the OECD areas decreased by 43%, while outflows from the OECD areas increased by 2%. Japan, the U.S. and Germany were the largest sources of FDI worldwide. The U.S. had negative outflows in Q1 2019 but regained its position as the major source of FDI worldwide in Q2. FDI inflows to non-OECD G20 economies increased by 21% and outflows remained stable. FDI inflows to the U.S. from China dropped to less than USD$1.2 billion.

5. International monetary system continues to evolve towards diversification

First, the currency composition of foreign exchange reserves continues to evolve. As shown by the IMF data, the U.S. dollar was still the most important reserve asset, accounting for 62% of the total, with a decrease of 0.76% compared with that in 2018. Although it marked merely a minor reduction, we should be mindful that it occurred in the context that other major currencies were relatively weak. Second, settlement systems achieved breakthrough in diversification. In January 2019, the United Kingdom, France and Germany jointly established the “Instrument in Support of Trade Exchanges” (INSTEX). Although it initially involved limited number of products and had only 10 participant countries, it marked the emergence of a euro-dominated payment system that bypasses the USD transactions. In addition, Russia, China and India have developed an alternative to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in the event of SWIFT disconnection. The new system will work as a “gateway” model when messages on payments in different payment systems are transcoded. The alternative is on the agenda of the BRICS cooperation. It may be a long journey to finally diversify the international monetary system, but it is likely that Trump administration’s abuse of the dollar’s hegemony will expedite de-dollarization process.

Factors Leading to Global Economic Slowdown and How Major Economies Cope With

The short-term reasons for the steep decline in world economic growth are mainly unilateral and protectionist policies pursued by the Trump administration, which have seriously jeopardized global trade and investment and severely weakened investors’ confidence. The IMF Managing Director Kristalina Georgieva said that for the global economy, the cumulative effect of trade conflicts could mean a loss of around $700 billion, or about 0.8 percent of global GDP. The U.S.China trade tensions, in particular, have dealt a severe blow to international trade, undermined commercial investment and affected employment. In this situation, global trade growth has hit a new low since 2012, and global investment growth has plunged sharply. In November 2019, the OECD released a report saying that aggregate investment growth in the G20 economies (excluding China) slowed from an annual rate of 5% at the start of 2018 to only 1% in the first half of 2019. The medium-term reasons for the global economic slowdown are that monetary and fiscal policies are becoming weaker and traditional policies are on the edge of failure. At a time when global economy slows down and relative poverty and inequality increase, quite limited room for further monetary easing has been spared for fiscal expansion. The direct reason for the world economic downturn is insufficient global aggregate demand, a combination of the demand for investment and consumption. The lack of the latter

is visible in the synchronized decline of global price level and economic growth. UBS estimated that the growth of global consumer spending in 2019 would hit a decade low, with India accounting for 40% of the slowdown and Turkey and China 25% each.

In addition, global economic slowdown is closely related to the sluggish in developed economies. According to the IMF estimate, the global economy will reach USD$ 87.27 trillion in 2019 and developed economies, with an estimated volume of USD$ 52.17 trillion, will take up 59.8% of the total. Developed economies, with the U.S. as a typical example, are suffering economic slowdown, wider wealth gap and constant financial turmoil. The deep-seated reason is the emergence of “rent-seeking capitalism”. Over the past four decades, market and political power created conditions for the privileged individuals and enterprises to grab enormous rent from others, while financial industry and its capacity to generate credit and capital provided ample finance for them to achieve this end. Compared with 40 years ago, the U.S. market is further concentrated, with a declining share of new entries in the marketplace, wider gap in terms of productivity and profit margin between champions and others, thus leading to less intense competition and a higher level of monopoly rents. Monopoly companies lobby the governments to be in favor of distorted and unfair tax policies and in opposition of necessary government regulation on mergers, antitrust efforts, financial misconduct, environment and labor market. The financial activities have seen explosive growth, yet they fell short of boosting productivity, but rather, widened the wealth gap in developed economies.

Despite of slowdown, world economy grew by 3% in 2019 and to the world’s relief, didn’t fall in recession, which directly attributed to the timely and appropriate measures adopted by major economies. After nine rounds of interest rate hikes by the U.S. Federal Reserve (Fed) within three years, it cut the Federal Funds interest rate for three times and lowered the overnight lending rate to a target range of 1.5% to 1.75% in 2019. Another sign of U.S. monetary policy back on the track of easing was that the Fed paused its reduction of the balance sheet and resumed bond purchase of short-term Treasury bills at a pace of USD$ 60 billion per month within the period from mid-October 2019 to Q2 of 2020. Europe moved in the same direction. The European Central Bank (ECB) announced to cut the Eurozone overnight deposit rate to -0.5%, keep the main interest rates at zero and maintain the overnight loan rate at 0.25%. While keeping the money stock stable, the ECB launched the European version of quantitative easing (QE) program that entails 20 billion euros of bond purchase per month starting from November 2019. In the meantime, the BRICS and many emerging economies and developing countries lowered interest rates and expanded government spending to varying degrees. As a result, 2019 has seen the government debt-to-GDP ratio rise from 50.8% to 53.8%. In view of the performance of major economies, despite of slowdown in U.S., Europe and China, they still scored economic growth of 2.3%, 1.6% and 6.0% respectively. In summary, the expansionary policies extensively introduced and the growth inertia of major economies are the main drivers for the global economy to grow by 3% in 2019.

Main Factors Deciding the Future Trend of World Economy 1. Negative interest rates are emerging and prevailing

Negative interest rates are emerging and exerting global impacts. In terms of policy interest rates, being negative means central banks apply negative interests on excess deposit reserves to encourage lending by commercial banks. Before the 2008 financial crisis, negative interest rates remained at a theoretical level. But ever since, several central banks in Europe resorted to negative interest rates to contain the risks of deflation and currency appreciation. In terms of interest rates for deposits and loans, being negative used to mean that banks collected service charges from considerable amounts of corporate deposits, but it now refers to deposits and loans of nominal negative interests from and to consumers. For example, Jyske Bank, the third largest bank in Denmark, sets the interest rate for high savers at -0.6% and at -0.5% for 10-year mortgage. In terms of market interest rates, negative interest rates once meant that the total interests paid in the remaining period of bonds were lower than the premium paid by investors when they initially purchased the bonds. But now bonds with negative nominal yield emerge and scale up rapidly, particularly in Europe and Japan. According to the Bank for International Settlements’ (BIS) Quarterly Review, there are over USD$ 17 trillion government bonds at negative interest rates, accounting for about 20% of global GDP and are growing fast. The Fed estimates that over 20% of the bonds in major developed economies will be at negative interest rates in the upcoming years.

Six interrelated factors lead to the emerging and prevailing of negative interest rates. First is the long-term tendency of policies aiming at response to financial crisis. In their efforts to prevent economic meltdown after the financial crisis, the central banks of major developed economies have adopted unconventional monetary policies and thus economic recovery since 2010 is not based on the resolution of existing structural problems. Second is the dramatic increase of market liquidity as a result of growing assets held by central banks. Third is the sharp decline of neutral interest rates in major developed economies. Fourth is the historical low level of inflation. Fifth is labor productivity growth slows down and dampens the demand for investment. Sixth is the ever more visible impact of aging population. In developed countries, the population aged between 55 and 64 consumes 15% less than those aged between 25 and 34.

Negative interest rates make complicated and profound impacts. First, they squeeze the profit margins of commercial banks and reduce the stock value of banks worldwide. In Q1 2019, the market value of global banking stocks was

20% less than that of the same period in 2018. Second, negative interest rates may incentivize enterprises to push up earnings per share by buying back through low-cost financing and bonds issuance or canceling stocks. Therefore, they will have less motivation to improve efficiency and less vigilance against risks. Third, the negative interest rates will fail the corporate financial models and algorithms built on positive interest rates and further make it difficult for the market to accurately evaluate enterprises, thus disrupting the fundamental role of market in resource allocation. Fourth, ultra-low interest rates will stimulate speculators to borrow and invest in high-risk assets in hope of grabbing high returns, which may increase financial risks at local or global level. Fifth, as some developing countries and emerging market economies have added US dollars or euros in their borrowing, changes in international market may entail higher risks of currency mismatch and further trigger a debt crisis. Sixth, they will push up asset prices and lead to misallocation of resources and widening gap of income distribution. Negative interest rates hurt low and medium savers, while benefiting high-income households through increased asset prices, which will increase inequality. Seventh, negative interest rates will exacerbate policy risks. Nominal negative interest rates cross the “threshold” of liquidity trap and as a result, conventional monetary policies and theories will fail while unconventional monetary policies will become normal. When policymakers carry out inaptitude policies in completely unknown market environment, it basically equals unprecedented level of policy risks. Last, negative interest rates may push governments on the throne as the sole engine for economic growth, because none dares to attempt to pull monetary policies back to “normal” in the current situation.

2. Risks in international financial market and lack of investment confidence

The IMF published the Global Financial Stability Report in October 2019, stating that due to low interest rates, investors have bought a total of USD$ 19 trillion of high-risk bonds, accounting for 40% of outstanding corporate bonds. In the case of default of the bonds, corporate-version of subprime mortgage crisis may break out. In countries and regions that make up 80% of the world’s GDP, shadow banking is suffering greater vulnerability that approaches the height of the global financial crisis. From 2007, prior to the outbreak of the financial crisis, to 2019, 48 emerging economies increasingly depended on foreign debt. As economy slows down, such exposure may magnify risks. In developed economies, especially in the U.S., ultra-low interest rates have blown the stock market bubble up to such an unprecedented size that any disruption may end in severe shocks. Among over 3,400 high net worth investors in 13 markets surveyed by UBS in November, more than half of them expected a significant drop in the markets at some point in 2020. Sixty percent suggested they would increase cash to cope with the recession. And fifty-five percent believed there would be a largescale market sell-off by the end of 2020. It is worth noting that cash reserves currently account for 25% of personal assets, 2 to 3 percentage points higher than the normal level.

3. Some countries were mired in social unrest

Recent period has seen social unrest and even riots breaking out in about 20 countries and regions across the world, which will definitely harm the global economy in 2020. In October 2019, with dissatisfaction with governance and livelihood, people in Iraq, Ecuador, Chile and Lebanon took to the streets, causing dozens or even hundreds of casualties. Riots prevailed in Guinea, Bolivia, Ethiopia, Spain and other countries as a result of people’s dissatisfaction with election and intensified internal political struggle. In face of a series of internal conflicts, U.N. Secretary-General Antonio Guterres said that it is clear that there is a growing deficit of trust between people and political establishments, and rising threats to the social contract. He called on protesters around the world to follow nonviolent models like Mahatma Gandhi and Martin Luther King Jr., and urged world leaders “to listen to the real problems of real people”. Such social turmoil in some regions and countries will exert its strong impact on the world economy in 2020.

Conclusion

IMF estimates that the world economy will slightly pace up to a growth rate of 3.4% for 2020. Developed economies are expected to grow by 1.7%, remaining in the same shape as 2019; and emerging markets and developing economies are expected to grow by 4.6%, embracing a drastic increase over 2019. As the factors containing world economic growth won’t be ripped away in the medium and long term, the world economy will continue its journey on the medium and low speed track in the upcoming years. With this basic judgment in picture, there is a high possibility that global economy will grow by 3% in 2020, the same rate as in 2019. The probability of rebounding to over 3.2% after dipping to the lowest is 20% and so is the probability of plunging to 2.8% to recession. It is worth noting that in December 2019, through the joint efforts of negotiation teams of China and the U.S., the two sides have reached consensus on the text of the phase-one bilateral trade agreement on the basis of equal footing and mutual respect. The new development will undoubtedly bolster global market confidence, stabilize market expectations and inject new impetus into the world economy. The Chinese Academy of Social Sciences estimated in December 2019 that Chinese economy would grow by 6% in 2020. In the scenario where all the rest economies experience zero growth, China alone, as the second largest economy, can drive 1% of the global growth, fully showing China’s enormous contribution to the global economy. Emerging market economies are expected to serve as the main engine of world economic growth in 2020 and Chinese economy is expected to play its role as “stabilizer” and “propeller”.