A turning point of the global economy

11.05.2017

When speaking at the G20 meeting held in Germany’s Baden-Baden on March 17-18, Christine Lagarde, Managing Director of the International Monetary Fund (IMF), said: “We met at a time when (economic) growth is gaining momentum around the world and there are signs that the global economy has reached a turning point, even though uncertainties remain.”

The global economy, having regained the 2008-2009 crisis losses in 2010-2012, showed steady but moderate growth at 2.4-2.7% in 2013-2016.

world gdpAccording to January’s forecasts of the World Bank and the IMF, the world’s GDP and production volume will begin growing in 2017-2019, and the latter will return to the level seen after 1980.

So, the World Bank forecasts the world’s GDP to grow to 2.9% in 2018-2019. At the same time, the annual GDP increase in the developed economies will be lower – at 1.8-1.7%, while GDP growth in the emerging and developing economies will be at 4.6-4.7%.

dynamic gdpThe IMF’s forecast for global output is more optimistic: 3.4-3.6% in 2017-2018. It is also predicted that production in the emerging and developing economies will grow more than two times faster than in the developed countries: 4.5-4.8% and 1.9-2.0%, respectively.

In this connection, the outlook for new physical and value growth of the world’s economy confirms the statement about a turning point.”

At the same time, the global economy has neared the following two qualitative realities.

To overcome the 2008 crisis and stimulate post-crisis economic growth in the developed world, primarily in the U.S., a program of so-called qualitative easing (QE) was launched combined with the introduction of ultra-low central bank rates.

This produced a certain positive long-term incentive for economic activities, but  simultaneously it badly undermined the financial sector’s health. According to the International Finance Institute, the world debt has risen by more than $70 Tln over the last decade, to a record $215 Tln, or 325% of the world’s GDP, including the following:

  • over this period, indebtedness of advanced economies has increased $32 Tln and reached $160 Tln, or 390% of GDP;
  • indebtedness of developing markets has grown by $40 Tln to $56 Tln (215% of GDP).

In view of the above, the inextricable connection between economic growth and purposeful and continuous pumping of the economy with financial resources (speculative to a large extent) is becoming a dangerous “turn” in the global economic development. In other word, economic growth begins to be based on growth of debts. 

In the near term this turn will lead to a global financial crisis and/or a large-scale military conflict in order to eliminate the debts.  This scenario is quite probable because the state elites, particularly in the advanced countries, hardly will go the way of curbing consumption and carrying out austerities – such steps would expectedly result in internal social conflicts and an elite change.

The diagram on the left presents the Organisation for Economic Co-operation and Development (OECD)’s assessment of the recession risk stemming from an excess of the debt threshold reached by 2017.

The second “turning” reality consists in the fact that due to faster growth of the developing economies compared with advanced ones the share of the emerging and developing markets in the world’s GDP (measured by purchasing-power parity) expanded from 42.3% in 1996 to 58.1% in 2016, according to the IMF’s latest data.

Apart from having achieved consolidated predominance in the global GDP value, the developing economies become increasingly self-sufficient. Yale University economist Stephen Roach points out that while the global trade growth rate over the last eight years was at 3% — half the 6% norm from 1980 to 2016, “yet, over the same period, GDP growth in the developing economies barely skipped a beat.. This attests to a developing world that is now far less dependent on the global trade cycle and more reliant on internal demand.”

There begins an epoch of a change in the global growth drivers. Among the developing countries, they included China and India, which gained independence and left the British Empire 70 years ago.

This change coincides with a boost in the trends toward the global economy’s regionalization. However, the developed nations need open markets in order to redistribute economic benefits and concentrate added-value generation points within themselves. The increasing role of the developing world in the global economy creates prerequisites for stiffer global competition and mounting of contradictions between the “centers of force” in the developed and developing countries.

Maybe, Mrs. Lagarde meant these realities when speaking about signs of a turning point and remaining uncertainties of the global economy.

 

UkrAgroConsult

Readers choice: TOP-5 articles of the month by UkrAgroConsult