VISIBLE REBOUND OF WORLD ECONOMY,LINGERING DIFFICULTY IN KEEPING THE GROWING MOMENTUM

YAO ZHIZHONG

Senior Fellow, Deputy Director of Institute of World Economics and Politics in Chinese Academy of Social Sciences

ZHANG YUYAN

Senior Fellow, Director of Institute of World Economics and Politics in Chinese Academy of Social Sciences

The world economic growth rate reaches around 3.6% in 2017 calculated in PPP terms, and 3.0% in market exchange rates terms, which has clearly picked up with continuous improvement in labor market, moderate rise in global price level and increase in international trade growth rate. However, at the same time, the foundation for world economic recovery is still not solid, while long-term factors supporting international trade rapid growth have yet to take shape. American fiscal and monetary policies are to generate large negative spillover effects upon world economy; the trend of de-globalization and trade and investment protectionism are on the rise; debt overhang problem are becoming more and more severe;asset bubble may burst anytime. Other problems like geopolitical risks and terrorism are exerting influences on the stability and development of world economy as well.

World Economic Situation

1.World economic growth rate has risen rapidly.

The world economic growth rate has picked up a lot in 2017, seeing the end of continuing downward trend. Such increase can be seen in both developed and emerging economies. According to IMF GDP forecast, the world GDP growth rate in 2017 shows an increase of 0.4 percentage point year on year in 2016. In developed countries, the GDP growth rate is 2.2%, up 0.5 percentage point year on year. In emerging markets and developing countries, the GDP has risen to 4.5%, 0.3 percentage point higher than the previous year.

2. Labor market has been steadily improved.

The US unemployment rate falls steadily, reaching 4.2% in September of 2017, the lowest jobless rate since the Financial Crisis. However, the US labor force participation rate has been improved very slightly. The unemployment rate in the EU decreased to 7.5%in September of 2017, from a record high of 11.0% in April of 2013. Japanese unemployment rate holds at 2.8% in September of 2017, reaching an all time low in the 21st century. Situations in emerging economies vary from each other. Countries with relatively good or improving economic situation like China and Russia see lower unemployment rate. On the contrary, South Africa is still faced with deterioration situation,with unemployment rate up 0.6 percentage point from 27.1% in September of 2016 to 27.7 % in September of 2017.

3. The price level is rising moderately.

The American Consumer Price Index(CPI) has risen by 2.0% in October of 2017 year on year, to which the increase in energy price index contributed a lot,while core CPI has shown a slowdown of growth in 2017. The EU has gotten rid of zero growth in prices and its Harmonised Index of Consumer Prices (HICP)has increased by 1.4% in October of 2017 year on year, 0.9 percentage point higher than the same time last year.Japan has finally exited deflation with CPI growth rate reaching 0.7% month on month. Emerging markets have generally kept inflation under control and the growth rates of CPI in Russia, Brazil,India, South Africa and China have pull back a bit. However, there are still some emerging markets facing serious inflationary environment such as Argentina,whose CPI growth rate stands as high as 23.1% in September of 2017.

4. There is concurrent rise in both world trade volume and value.

In 2017, international trade features the increase in both volume and value.According to WTO database, the growth rates of world commodity export volume respectively has picked up by 11.4%and 7.4% year on year in the first and second quarters of 2017, with rises of 6.9 percentage point and 3.9 percentage point. These growth rates in real terms after being adjusted for prices are 4.4%and 3.5% accordingly, an increase of 3.8 percentage point and 1.0 percentage point year on year. Such rises in both trade volume and value serve as a bright spot in world economy in 2017 and as an important channel for major economies to boost global development through national economic recovery.

5. The Foreign Direct Investment re -mains sluggish.

In 2016, the world Foreign Direct Investment (FDI) in flows stood at $1.75 trillion, down 2% year on year. Restrictive policies have been adopted in the global investment. Some countries chose for reevaluation or unilateral termination of the existing international investment agreements, such as Indonesia and India. The US has declared to comprehensively reassess all of its bilateral and multilateral signed contracts. In 2017,an apparent rise lies in world economic growth rate, the amount of FDI picking up accordingly. However, signs of rapid growth of transnational investments are rare to see. The UNCTAD has made a forecast of a 5% growth in global FDI inflows to $1.8 trillion in 2017. It is predicted that there might be only a slight increase in FDI in 2018.

6. Global outstanding debt keeps growing.

American government’s debt-to-GDP ratio keeps growing from 107.1% in 2016 to 108.1% in 2017. Japanese government gets struck in deterioration with the ratio increasing from 239.3% in 2016 to 240.3% in 2017. With regard to the Euro Zone, the ratio stared to drop since 2015 and falls back to 87.4% in 2017. For emerging markets and medium-income economies on the whole, the ratio keeps at a low level with sustained increase,changing from 46.8% in 2016 to 48.4% in 2017. Global non- financial sector debt-to-GDP ratio is rising in that resident and corporation debt are accumulating in the world. According to statistics from Bank for International Settlements(BIS), global non-financial sector debtto-GDP ratio has risen from 231.7% in 2015 to 234.8% in 2016, and 238.4% in the first quarter of 2017. Such growing global debt-level would continue to pose a threat to the economic stability in the world.

7. The volatility risks in financial market are rising.

In 2017, the international financial market features two aspects: soaring stock market and sustained USD depreciation. According to Morgan Stanley Capital International (MSCI) Index,global stocks has increased by 19.32%from the start of 2017 to Nov.27th, with emerging markets’ shares up 33.86%and developed countries up 17.61%.However, there is large bubble risk hidden in the fast-growing global stock market. In September of 2017, nominal and real US dollar index have devalued respectively by 7.5% and 7.9% compared with that of December in 2016. Such depreciation has lead to the appreciation of the rest major currencies against dollars. The resulting currency revaluation in emerging countries would deteriorate terms of current account, thus leaving hidden dangers to future currency stability.

8. The international commodity market is running at medium-and-low prices.

International commodity prices had seen a large increase from October of 2016 to February of 2017, followed by four consecutive monthly decrease and again continuous rise since July. In September of 2017, Commodity Prices Index grew by 4.3% in USD terms and 1.6% in SDR terms, compared with that of June. In 2017, the Average Petroleum Spot Price (APSP) in UK Brent, WTI and Dubai Fateh once rose to $54.4 a barrel in February and dropped all the way to$46.1 a barrel in June, followed by the rebound to $54.9 in October, among which Brent crude oil spot price exceeded $60 a barrel on October 27thand reached a recent peak of $64.5 on November 9th.

Crucial Factors Aあecting World Economy

1.Whether economic recovery has a solid foundation.

The Financial Crisis could exert negative influences on economy mainly through three transmission channels.First, when financial intermediations suffer from asset impairment and credit expansion slowdown, they may cut off credits, which would lead to economic contraction. Second, generally financial intermediations would chase safe assets, choose to reduce loans to risky assets or demand higher risk reward, which would result in economic shrinking. Third, when residents and firms lose money during the recession and are heavily burdened with debt,they would cut down consumptions and investments. At present, financial institutions have made strides in repairing the balance sheets. Yet there is still no fundamental change in financial intermediations’ demand for safe as-sets in developed economies. Residents and firms could get a quick recovery of asset values, but debt level is not easy to go down. These three transmission channels can be repaired yet only to a certain extent. Thus, world economy has not gotten back on track of strong and sustainable development.

US President Donald Trump hailed a "historic" victory as the US Congress passed a massive Republican tax cut plan, handing the president his first major legislative achievement since taking office nearly a year ago.

2. Whether international trade growth could be sustainable.

At present, world economic situation is getting better and expansion in demand is offering support to international trade development. However,the US has declared to withdraw from Trans-Pacific Partnership Agreement(TPP), while the negotiations on Transatlantic Trade and Investment Partnership (TTIP) between the US and EU and on Bilateral Investment Treaty (BIT)between the US and China have largely reached an impasse. Trade protectionism is on the rise worldwide. Although India, Vietnam and Eastern Europe have jointed Global Production Networks,there is not much change in the pattern of Global Value Chain. Therefore, the foundation for active international trade is not very solid. It is predicted that global exports value growth rate will be raging from 5% to 10% and exports volume in real terms would be round 5%.

3. What spillover effects may come from US fiscal and monetary policies.

With regard to the US fiscal and taxation policies, President Trump has announced tax cuts and government spending cutbacks, while vowing big spend on defense and infrastructure.These plans would bring a small bump to the GDP growth rate and large increase in fiscal deficit and government debt. The rise in the US GDP growth rate would generate positive spillover effects to world economy, while fiscal deficit and growing government debt would bring about negative spillover effects. The US Federal Reserve’s decisions of hiking the rate and shrinking balance sheet by parting medium and long-term bond holdings and Mortgage-Backed Security (MBS) would lead to the rise in American interest rate in future. Such rise would on the one hand restrain American economic growth,and on the otherhand lead to capital inflows to the US and the appreciation of USD, which would result in the depreciation of other major currencies and currency instability in emerging markets especially. The degrees of such effects would depend on the paces of the Federal Reserve in raising the rate and reducing the balance sheet.

4.How will the de-globalization trend develop?

The immanent cause of de-globalization lies in economic imbalance and internal inequality among major countries in the world. Trade imbalance results from domestic imbalance in savings and investments, as well as the lack of automatic adjustment mechanism for international balance of payments in the international economic system.President Trump’s policies of tax cuts and increasing fiscal spending would lead to expanding financial deficit and trade deficit. This might push Trump to adopt tougher protectionist approaches,thus possibly giving rise to wider deglobalization trend. Income inequality in developed economies has worsened owing to three reasons: wealth concentration, technology process and globalization. Globalization brings about such inequality because of the disfunction of compensation mechanism for those whose interests have gotten damaged during the globalization process.

5. What are consequences to accumulating global debt.

The financial rules have been set to regulate government debt in major developed economies, but fail to stop debt ballooning. The effective approaches to reducing debt burden consist of rapid economic growth, monetization of the debt and default. However, too much debt would hinder the increase in growth rate, while debt monetization and default would lead to economic slowdown. Excessive debt of non-financial corporations in emerging economies, resulted from inadequate development of Equity Financing Market, to a large extent has reflected that credit is the driving forces of economic recovery.The future deleveraging in non-financial sectors of emerging markets would affect economic vitality. Another consequence of the rapid increase in resident debt would be the imbalance between savings and investments caused by over-consumption, and thus imbalance in international payment. Domestic saving shortfalls would reduce capital accumulation rate and harm economic potentials for long-term development.The imbalance in international payment is like to trigger currency crisis as well as external debt crisis because of the growing external debt.

6. Whether asset bubble will burst.

Existing low interest rates and loose monetary policies in developed economies have given rise to the increasing asset prices. In October of 2017, the monthly closing prices of S&P 500, Dow Jones Industrial Average and Nasdaq Composite Index has risen respectively to 1.66, 1.68 and 2.35 times over the peak before the Financial Crisis. Besides, the US S&P/Case-Shiller 20-City Composite Home Price Indices have been close to the highest level before the Subprime Crisis. There is also sustained and rapid growth of asset price in developed countries including Europe and Japan.The US Federal Reserve’s actions of raising the rate and reducing balance sheet carry a risk of bubble bursting. If not, it would at least lead to the soaring rate especially in the medium and longterm, the capital outflow from other markets and possible the pricking of asset price bubble in these markets.

World Economic Prospects for 2018

It is predicted the global economic growth rate calculated in PPP terms would reach around 3.6% and 3.0% in market exchange rate terms in 2018.The predicted rates are lower than the forecasts from IMF and other international organizations, reflecting our worries about unstable foundation for world economic recovery, risky asset price bubble, ballooning global debt level,trend of de-globalization, adjustment of the US policies, Brexit process as well as other geopolitical conflicts. Besides,it is predicted that the commodity price would still remain at a medium-to-low level with crude oil price fluctuating around $60 a barrel.