Global economic prospects face many dangers
When world leaders gathered in Davos for the World Economic Forum’s annual meeting last week, the global economy was not at the forefront of discussions, as it so often is at these January gatherings. The assembled captains of industry and notables from politics and civil society instead spent most of their time discussing environmental issues and sustainability.
US President Donald Trump was the odd man out when he praised his economic achievements during his opening speech. Oddly enough, just a few hours before he ascended to the podium, the International Monetary Fund (IMF) released a downward revision to its October World Economic Outlook — by 0.1 percent for the world economy in 2019 and 2020, to 2.9 and 3.3 percent respectively. The downward revision for 2021 was calculated at 0.2 percent, which means that global economic growth is now estimated to be 3.4 percent for that year.
US economic growth will stand at 2 percent instead of the predicted 2.1 percent for 2020. China is set to grow by 6 percent instead of 6.1 percent.
IMF chief economist Gita Gopinath cited the lower growth rate in India, stressed and underperforming economies in emerging markets, and geopolitical tensions as the reasons for the downward revisions.
The news was not all bad, however, as global growth is still expected to rebound from 2019, when it stood at 2.9 percent — the lowest level since the global financial crisis. In that sense, 3.3 percent does constitute a year-on-year improvement. US economic growth will slow from 2.3 percent in 2019 to 2 percent this year, as the effects of the 2017 tax cuts dissipate.
The improved global economic outlook is attributed to trade tensions between the US and China abating in the light of the conclusion of phase one of their bilateral trade agreement.
IMF chief Kristalina Georgieva estimated that global trade tensions will make the world economy $700 billion or 0.8 percent worse off in 2020, compared to where it would have been without the tariff increases we have seen over the last two years.
An acceleration of global economic growth this year and next, compared to 2019, is good news. It is particularly important for the outlook on oil, which remains the premier fuel of transport and, as such, depends on thriving trade. What is good for oil generally is good for the Gulf Cooperation Council economies, which, while diversifying, still largely depend on the fortunes of the commodity.
However, we are not out of the woods just yet. The US and China have only agreed on phase one of their comprehensive trade deal. The hard part will be phase two, which will address structural issues such as subsidies for state-owned enterprises in China. The EU fears that Trump might focus his attention on Europe next, with the German car industry at particular risk. The automotive industry does not need more headwinds — it is suffering from huge uncertainty due to the structural shift from the traditional combustion engine to hydrogen-powered, hybrid and electric vehicles over the coming decades.
The improved outlook is attributed to trade tensions between the US and China abating in the light of the conclusion of phase one of their bilateral trade agreement.
Over the last 15 years, Germany’s open economy has served as the engine for its European counterparts. But it was particularly hard hit by the US-China trade spat, as many of its capital goods and cars are bound for the Asian behemoth.
Europe may have avoided a no-deal Brexit, with all of its disruptions, for this year. However, UK Prime Minister Boris Johnson has made it quite clear that he will not extend the transition phase beyond Dec. 31. UK and EU manufacturers should fasten their seatbelts in case a trade agreement cannot be reached by that date.
It is undeniable that the 10-year expansionary cycle of the world economy is nearing its end. The question is how the next two years will evolve. Trade tensions may have abated, but they are a long way from being resolved. Phase one of the agreement stipulates that China has to purchase an extra $200-billion worth of goods in certain categories from the US. This will dislocate other exporters of agricultural and manufactured products, as well as energy. Geopolitical tensions also persist and can flare up at any time.
The world is furthermore not immune to black swans, as the outbreak of the coronavirus in China last week proved. It could not have come at a worse time: The beginning of the Chinese New Year festivities constitutes the prime traveling and consumption event in the Chinese calendar. No wonder, then, that concerns over the virus shaved $6 off the price of oil in just one week.
Underlying all the one-time or man-made (read trade) events, there is the key structural issue that we live in an ultra-low interest rate world and that most central banks in OECD countries and China have bloated balance sheets. This means there is only so much that these institutions can do when we see a further slowing of the economy. Quantitative easing to the extent we saw in 2008-09 is out of the question in Europe, Japan and in many other places. Fiscal policy is the only way out under such a scenario, which is in line with the current thinking of both the IMF and the European Central Bank. Some countries can afford to do more in this space — like, for instance, Germany, which has balanced its budgets for many years. Others have reached their limits. There is a wall of debt, both public and/or private that many countries will have to address, be they the US, Japan, China or nations in Europe and emerging markets.
In other words, the outlook for this year and next is not bad, but dangers loom around many corners.
• Cornelia Meyer is a business consultant, macro-economist and energy expert.Twitter: @MeyerResources