Global trade under clouds

B K Mukhopadhyay | Published: July 21, 2018 21:40:04 | Updated: July 23, 2018 20:32:28

The World Bank is of the view that after reaching 3.1 per cent in both 2017 and 2018, global growth is expected to decelerate over the next two years as global slack dissipates, major central banks remove policy accommodation, and the recovery in commodity exporters matures. Amid moderating international trade and tightening global financing conditions, growth in emerging markets and developing economies (EMDEs) is projected to plateau, reaching 4.7 per cent in 2019 and 2020, up from 4.5 per cent in 2018.

Jim O'Neill, an honorary professor of economics at Manchester University and a former chairman of Goldman Sachs Asset Management, former commercial secretary to the UK Treasury, former Chairman of the Review on Antimicrobial Resistance, has rightly warned "the global mood [had] shifted from fear about political risks to obliviousness, even though many such risks still loom large...Moreover, while my preferred global indicators were all looking up, I worried about whether that would continue after the first half of 2018, given foreseeable complications such as monetary-policy tightening across advanced economies, especially in the US". He pointed out that at this time last year, the global economy was experiencing strong, widespread growth, with even the long-stagnant European Union staging a robust recovery. But with key indicators of trade and investment now weakening, a new crisis - not least a global trade war - could quickly bring the global upturn to a halt.

THE WORLD THAT IS NOW:  While the US Institute for Supply Management's June Purchasing Managers' Index (PMI) remains very strong, other comparable surveys around the world are not nearly as robust as they were six months ago. Most importantly, business activity has slowed in both China and Europe.

France and Germany have experienced a slowdown, perhaps owing to fears of a global trade war. Italy's new anti-establishment government and an intra-EU political crisis over immigration, have all created more economic uncertainty. The immigration crisis, in particular, could have severe consequences both for German government and for EU cohesion. South Korean exports had fallen year-on-year in June 2018.

Side by side, some weak performers are on the mend of late - in nominal dollar terms, Brazil, the EU, Japan, and Russia all experienced slight declines since 2010, but showed signs of improvement in 2017. Economies of India, Bangladesh, and others are coming up. South Korean exports to the US and China was actually rather strong; the weakness was in exports to Association of Southeast Asian Nations countries and the Middle East.

In 2017, India became the sixth largest economy with a gross domestic product of $2.59 trillion, relegating France to the seventh position. The Gross Domestic Product (GDP) of France stood at $2.58 trillion. The United Kingdom, which is facing Brexit blues, had a GDP of $2.62 trillion, which is about $25 billion more than that of India. The US is the world's largest economy with a size of $19.4 trillion, followed by China ($12.2 trillion) in the second place. Japan ($4.87 trillion) and Germany ($3.67 trillion) are at the third and fourth places, respectively. Based on GDP size, other three countries in the top ten are Brazil (8th), Italy (9th) and Canada (10th).

There is little doubt that the world economy is dominated by activity in the US and China. As per recent calculations, 85 per cent of the growth of nominal GDP worldwide since 2010 is due to these two countries, with the US accounting for around 35 per cent and China accounting for around 50 per cent. As such so long as China and the US are doing fine, the global economy can be expected to sustain annual output growth of around 3.4 per cent.

WHAT ABOUT THE FOOD SECTOR? The UN predicts that we must increase food production by 70 per cent by mid-century. This, in turn, will place additional pressure on already-stressed water resources. There is also need for allocating more water to satisfy global energy demand - which is expected to rise by 60 per cent over the coming 30 years - and to generate electricity for the 1.3 billion people currently without it. It is crystal clear that there will not be enough water available on current croplands to produce food for the expected 9.0 billion world population in 2050 if current trends and changes towards diets common in western nations are any indication. Undoubtedly, with 70 per cent of all available water being used in agriculture, growing more food to feed an additional 2.0 billion people by 2050 will place greater pressure on available water and land. Competition for water between food production and other uses will intensify pressure on essential resources. The fate of the world's poor is uncertain if they remain at the mercy of the fragile global food system.

SILVER LINING? Though global trade is recovering at a snail's pace, yet investment remains weak. Rightly, WB has opined that countries now need to undertake institutional and market reforms in order to attract private investment, which, in turn, will help sustain growth in the long-term. To what extent shifting of priorities by WB for lending toward projects that can spur follow-on investment by the private sector would be successful, remains a matter to be seen.

IS GDP NOT A POOR INDICATOR OF PROGRESS? GDP has been  widely used over the years to measure economic progress. But many rightly argue that it's not a useful indicator. Nobel Prize-winning economist Joseph Stiglitz, IMF head Christine Lagarde and MIT professor Erik Brynjolfsson have all said that GDP is a poor indicator of progress, and argued for a change to the way we measure economic and social development. Alternatives could include measuring jobs, well-being and health. GDP also ignores the impact of important things like climate change. The time is now to reconsider these details before allowing GDP to run as it has been running till now.

FUTURE DEPENDS ON ACTIONS TAKEN TODAY: Reflecting on the words of Jim O'Neill, it can be concluded that 'the sustainability of global growth depends largely on the US and China. Obviously, if these two economic giants are going to start trading blows with tit-for-tat tariffs, both will lose - and so will the world economy. For the US, where consumption accounts for around 70 per cent of GDP, positive international trade and a stable, friendly investment climate are essential for sustainable growth'.

THE UPSHOT: At the start of 2018, most of the world economy was experiencing a synchronised cyclical recovery that seemed to herald a longer period of sustainable growth and an end to the decade-long hangover from the 2008 slump. Despite the shock of Brexit, storm clouds over the Middle East and Korean Peninsula, and US President Donald Trump's unpredictable behaviour, rising investment and wages, alongside falling rates of unemployment, had appeared to be in the offing.

Dr B K Mukhopadhyay is a noted management economist and an international commentator on business and economic trends.

He is also the Principal of ICFAI University, Tripura, India.





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