Global Economy: Stiff Headwinds, Weak Recovery, Risky Future
Looking back at the state of the global economy in 1-H of Y 2016, it is disappointing to see a weak recovery and a risky future.
In its Global Economic Prospects released in June, the World Bank (WB) revised its Y 2016 global growth forecast down to 2.4 from the 2.9% pace projected in January, due to “sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows” in 1-H of Y 2016.
In April, the International Monetary Fund (IMF) also lowered its forecast for global growth in Y 2016 to 3.2%, saying that the global economy grows at a sluggish pace that leaves the world economy more exposed to risks.
The IMF predicted that in the next 5 years, global economic output can decrease 4% from normal amount, meaning the “new mediocrity” is becoming the “new normal.”
Under the current circumstances, governments of the world’s major economies are adjusting policies to ensure a sustained stimulus to protect the vulnerable recovery. But, the passive counter-measures overwhelm active adjustments.
On 16 December 2015, the US Fed raised the fed fund’s rates for the 1st time in about 10 years, signaling a growing confidence in the US economy since the 2007-2009 financial crisis.
Then it became widely expected that the Fed would to increase interest rates for another 4 times in T 2016, yet the Fed has made no such a move in the past 6 months. The expectation to another interest rate hike has been dampened for this year, especially so after Britain’s voted exit from the EU, aka Brexit.
Europe, another major economy, has faced many challenges this year, including terrorist attacks, refugee flooding and Brexit.
In March, the European Central Bank (ECB) launched an unexpectedly broad array of stimulus measures ranged from interest rate cuts to cheap loans to banks, to boost the anemic economic recovery in the 19 European countries.
Markets are expecting even more ECB stimulus after Brexit this Summer.
In Japan, the “Abenomics” 3 Arrows economic policy has proven a failure despite a 2-prong monetary and fiscal policy.
In emerging economies Russia and Brazil, the counter-measures against the depressive commodity prices and slow capital flows in the global market seem weak and insufficient.
China and India have more room to maneuver.
China is deepening its economic reform and seeing the economic transition bearing fruits. In the 1st half of Y 2016, China ‘s economic growth reached 6.7%, a bright figure Vs the dim backdrop of a sluggish global economic recovery. Currently about 33% of the world’s economic growth comes from China.
In India, the Modi Government is driving economic reform and has recently announced sweeping moves to expand foreign investment in 9 areas as part of attempts to open up the economy.
So far the world economic recovery has not formed the “V” shape or “U” shape as many anticipated, but like an “L” shape.
American economist, and former Secretary of the Treasury, Larry Summers warned of deep economic stagnation, or “secular stagnation,” i.e. after the economic crisis is over, low interest rates and low growth rate will coexist in the long run.
Facing such a grim outlook, some experts have offered solutions, as follows:
- It is critical for major economies to strengthen coordination on global policies, and give positive signals to world markets to boost confidence. The upcoming Group of 20 Summit (G20) to be held in China’s Hangzhou offers a platform for major economies to discuss such a matter.
- For eligible economies, central banks should consider further relaxing fiscal policies besides sustaining low interest rates, and improving the effectiveness and orientation of the policies.
- For both developed and developing economies, further promoting structural reforms holds the Key for sustainable economic growth.
Have a terrific week.