So far, this year has provided further evidence of a divided and disconnected world economy that faces major policy dilemmas. Europe is imploding, the UK is contracting, the US is stagnating and, while Asia is cooling, it at least has the policy tools to be able to rebound.
The global economy has slowed significantly, from a healthy, policy-induced growth rate of 4.2 percent in 2010 to a much cooler 3 percent growth last year. This year, global growth may be only 2.6 percent. This masks considerable differences, but, as we have seen in recent years, globalization means no region of the world is completely immune to problems in the West.
The good news is that, helped by policy stimulus, emerging economies, led by China, may see a pickup into next year. The trouble is many economies in the West are running out of policy tools to be able to respond if they are hit by another shock. Hence, it is easy to construct a “perfect storm” scenario for next year, in which a combination of problems comes together and things get worse.
The biggest shock would be if energy prices were forced higher following a Western-led attack on Iran. This is not inevitable, but the risk cannot be overlooked. It would come as a major blow to global growth as the recent easing in oil prices has helped many economies considerably.
For now, the biggest shocks are coming from Europe. This is the world’s weakest link, which is remarkable given how wealthy that region is and how strong some of its core economies are, especially Germany. It is staggering how Europe’s political leaders have let it get this bad.
Over the past year, there has been a need for European politicians to act fast, comprehensively and ahead of events. Instead they have been slow, inadequate and, usually, have only acted after problems have emerged. To make matters worse, they are also focusing on the wrong problem — of excessive debt — when the real challenge facing Europe is the lack of growth.
At their recent summit — the 19th in a couple of years — European leaders finally made some progress, but it was not enough to end recession and to address deep-rooted issues at the heart of the euro. However, their actions also led the European Central Bank (ECB) to cut interest rates to a record low of 0.75 percent. In the coming months, a return to unconventional policy may be needed, such as the ECB buying bonds and providing cheap long-term loans to banks.
If only the US was booming, things might not be so bad — but it isn’t. The US economy is as weak as Europe’s, despite increased optimism about low energy prices because of shale gas and despite big firms being in great shape. Thus US interest rates are staying near record lows.
No matter who wins the presidential election, some difficult decisions on tax and government spending need to be addressed and the likelihood is the US faces only steady and far from spectacular growth.
Western economies may be only halfway through their painful adjustment. Gross government debt levels in advanced economies have risen from an already high average of 74 percent of GDP ahead of the crisis to 105 percent by the end of last year. However, one of the main reasons government borrowing is rising is because growth and demand are so weak, as people and firms continue to pay down their debt and deleverage.
A related worry is that in trying to prevent a depression and financial meltdown, central banks have inflated their balance sheets across the globe, from China and Japan to Europe, the UK and the US. The aggregate assets of central banks now stand at a huge US$18 trillion, or about 30 percent of global GDP. This is twice the ratio of a decade ago. In addition, policy interest rates are below inflation in many countries, discouraging savings and encouraging speculative activity.
Such loose monetary conditions indicate that central banks have become the shock absorbers for the world economy.
This is particularly challenging for the emerging economies, as it is they who have to cope with the fallout from low rates in the West. Capital will flow toward their economies in search of higher yields and all this at a time when some of them now face homegrown problems. While the West is in a mild depression, emerging economies, having seen steady growth in recent years, are at a more advanced stage of the cycle which, in the past, may have led to trade or inflation problems.
That is why no one should be surprised if there are setbacks across the emerging world; after all, the business cycle does exist. The trend is up, but there will be setbacks along the way.
That is the reality, but it is important not to confuse cyclical setbacks being seen in a number of emerging countries with positive longer-term structural features.
Despite the crisis in the West, the world economy continues to grow, led by the likes of China and India. “32-62-72” is the phrase that I use to describe this. The world economy had grown from US$32 trillion in 2000 to just under US$62 trillion on the eve of the crisis and, in nominal terms, it is set to reach US$72 trillion at the end of this year. The shift in the balance of power continues to make the global economy bigger and, in doing so, provides markets for countries and firms in the West to sell into.
This period of global change is also an opportunity for countries to make structural changes, whether it be the need to address low productivity rates in a number of Western economies, or the need to implement reforms or move up the value-curve across the emerging world.
In this global environment it is important not to lose sight of a number of key factors. First, there are still considerable risks out there; hence, the fear of a “perfect storm” next year.
Second, the economies in the West are still finding it hard to work off all the excesses of the past, and these challenges are not being helped in Europe by the slow and, at times, stubborn political process. And then there is the emerging world. This group is not immune to what happens elsewhere, but is much better able to cope.
Yet, in just looking at what has happened recently across economies as diverse as India, China, Brazil or Indonesia, it is clear that while the longer-term outlook is positive, there will be setbacks along the way. Sometimes these may be significant, other times they may be easier to manage. Thus the key is to focus on a combination of economic fundamentals, policy and confidence.
Gerard Lyons is chief economist at Standard Chartered Bank.
Saudi Arabian largesse is flooding Egypt’s cultural scene, but the reception is mixed. Some welcome new “cooperation” between two regional powerhouses, while others fear a hostile takeover by Riyadh. In Cairo, historically the cultural capital of the Arab world, Egyptian Minister of Culture Nevine al-Kilany recently hosted Saudi Arabian General Entertainment Authority chairman Turki al-Sheikh. The deep-pocketed al-Sheikh has emerged as a Medici-like patron for Egypt’s cultural elite, courted by Cairo’s top talent to produce a slew of forthcoming films. A new three-way agreement between al-Sheikh, Kilany and United Media Services — a multi-media conglomerate linked to state intelligence that owns much of
The US and other countries should take concrete steps to confront the threats from Beijing to avoid war, US Representative Mario Diaz-Balart said in an interview with Voice of America on March 13. The US should use “every diplomatic economic tool at our disposal to treat China as what it is... to avoid war,” Diaz-Balart said. Giving an example of what the US could do, he said that it has to be more aggressive in its military sales to Taiwan. Actions by cross-party US lawmakers in the past few years such as meeting with Taiwanese officials in Washington and Taipei, and
Denmark’s “one China” policy more and more resembles Beijing’s “one China” principle. At least, this is how things appear. In recent interactions with the Danish state, such as applying for residency permits, a Taiwanese’s nationality would be listed as “China.” That designation occurs for a Taiwanese student coming to Denmark or a Danish citizen arriving in Denmark with, for example, their Taiwanese partner. Details of this were published on Sunday in an article in the Danish daily Berlingske written by Alexander Sjoberg and Tobias Reinwald. The pretext for this new practice is that Denmark does not recognize Taiwan as a state under
The Republic of China (ROC) on Taiwan has no official diplomatic allies in the EU. With the exception of the Vatican, it has no official allies in Europe at all. This does not prevent the ROC — Taiwan — from having close relations with EU member states and other European countries. The exact nature of the relationship does bear revisiting, if only to clarify what is a very complicated and sensitive idea, the details of which leave considerable room for misunderstanding, misrepresentation and disagreement. Only this week, President Tsai Ing-wen (蔡英文) received members of the European Parliament’s Delegation for Relations