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World Economy on an Upward Trajectory?
After years of languid growth, the global economy shows moderate recovery
By Chen Fengying | NO. 32 AUGUST 10, 2017

Workers at the welding workshop at electric bus giant BYD’s North American plant in Lancaster, California of the U.S., on March 23 (XINHUA)
The world economy has been recovering since the first half of 2017, and has exhibited moderate growth after six years of slowing down. It is the first globally synchronized recovery for all areas and every major economy since the 2008 financial crisis. However, the global economic environment is still highly uncertain due to the influence of Brexit negotiation, the Trump administration's unpredictable policies and the U.S. Federal Reserve's cycle of interest rate hikes. The surge in protectionism and global debt also casts shadows on the development of the world economy. In the future, structural adjustment, innovative growth and inclusive development are crucial to resumption of healthy development and sustained economic growth.

Synchronized recovery

Both advanced and emerging economies are picking up steam and show signs of cyclical expansion from the last half of 2016 to the first half of this year. Recently, international organizations upgraded their growth projections for the world economy in 2017 and 2018. According to forecasts by the International Monetary Fund (IMF), the world economy will grow 3.5 percent this year and 3.6 percent in the coming year, much higher than the average rate in recent years. What's more remarkable is that this is the first instance of recovery throughout all areas in years.

The IMF also predicts that nations and regions covered by the Group of 20 (G20) will observe decent economic growth, which is of vital importance to trade and investment stability. The G20 economies account for 85 percent of global GDP and contribute 80 percent to the increase in world trade. China is conducting supply-side structural reform through technological innovation, industrial upgrading, economic transitioning and infrastructure construction under the Belt and Road Initiative. The U.S. Government issued a series of policies including tax cuts, infrastructure plans, deregulation and energy independence to achieve manufacturing renaissance. Every country is speeding up to adjust their economic structure and innovate. In this context trade and investment in the global economy have increased.

Steady recovery

Recently, economic recovery in developed countries has been on firmer footing. According to IMF estimates, growth in these countries would increase from 1.7 percent last year to 2 percent in this year and the next—moreover, the trend has been spotted in all developed countries.

The U.S. economy continues to gain momentum. Recently, U.S. home prices reached an all-time high, and the manufacturing purchasing managers' index (PMI) hit a 24-month high. Moreover, its unemployment rate fell to a historical low of 4.3 percent, inflation is still below the targeted 2 percent, and the 1.2 percent economic growth in the first quarter is expected to increase to 3 percent in the second quarter. This data could bolster the Fed to make adjustments and increase interest rates. According to recent IMF estimates, the U.S. economy will grow by 2.1 percent in the next two years. Considering the size of the economy, which is more than $19 trillion, the estimated 2.1-percent growth is fairly impressive. The Organisation for Economic Co-operation and Development (OECD) claims that the Trump administration' tax-cut policy and the $1-trillion infrastructure plan will contribute to the economic recovery, especially in 2018.

The eurozone economy is also showing signs of a steady recovery. European economy has remained unscathed from Brexit, the refugee crisis and terrorist attacks, and has now begun to rebound. The manufacturing PMI hit a 34-month high last November; more employment opportunities have been made available; and consumption has gradually picked up. In the first quarter, the eurozone economy, mainly driven by domestic demand, expanded 1.9 percent. The IMF forecasts that the eurozone economy will grow by 1.7 percent and 1.6 percent respectively in the next two years. Although the British economy has slowed down due to Brexit, its long-term prospects are not pessimistic.

The first China-Europe freight train returns from London in the UK to Yiwu, a city in China’s east coastal Zhejiang Province, on April 29 (XINHUA)

Late-mover advantage

Economic growth has been slowing down in emerging markets due to falling commodity prices, continued depreciation of local currencies and capital flight, but it is still twice as high as that of developed economies. The IMF predicts that the economy will increase by 4.5 percent and 4.8 percent respectively in the next two years, which is higher than that of last year, and will rise to 5 percent in 2019 to 2022. The late comer advantages in emerging economies are still available.

Asia stands out in the world economy and remains the fastest-growing region, but will slow down due to China's lower GDP growth prospects. The IMF predicts that the economic growth rate will level off at 6.4 percent in the next two years, which is still higher than that of the Middle East, Central and East Europe and Africa. South Asia's economic growth has accelerated significantly. With the promotion of the Belt and Road Initiative, Asian countries are looking for positive and interactive development through infrastructure construction to enhance interconnectivity and platform-building to advance regional economic and trade cooperation.

Emerging markets are still the major driver of global economic expansion. They have managed to tackle various unfavorable conditions by improving policy framework and implementing structural reform. The IMF believes that emerging economies, responsible for nearly 80 percent of global economic growth, are more than just manufacturing centers or trade hubs to pack up and transport goods to developed economies: They are of increasing importance as the final destination of services and products.

Vital factors

The simultaneous expansion of manufacturing PMI in major countries is an important indication of world economy growth. The PMI of major manufacturing countries—China, the U.S., Japan, Germany, Britain and France—have begun expanding simultaneously from the fourth quarter last year. That means the real economy has rid itself of the weak situation caused by the financial crisis and has started the capital increase and expansion period. This will drive international trade and global direct investment growth, create more jobs and stimulate consumption growth.

The resumption of growth in international trade and global direct investment underpins a sustained economic recovery. The IMF foresees a 3.8-percent growth in international trade this year, better than the average 2.9 percent since the financial crisis and much higher than the 2.6 percent seen in 2015 and 2.2 percent in 2016. The World Investment Report 2017 issued by the United Nations Conference on Trade and Development estimates foreign direct investment (FDI) will rise by 5 percent and reach $1.8 trillion, and will continue growing until 2018.

Lingering uncertainties

The spread of trade protectionism and the wave of anti-globalization have cast a shadow on the healthy development of the world economy. The wave of anti-globalization implies that there are institutional problems in the West-dominated economic order and also shows that globalization is at a crossroads. Rising protectionism could affect the growth of global trade and the uncertainties in policy may damage market confidence and the willingness to invest.

The high global debt threatens the sustainable development of the global economy. On one hand, the quantitative easing policy implemented by central banks of the U.S., Europe and Japan led to rampant global liquidity: The long-term low or even negative interest rates have reduced the costs of financing. On the other hand, the fiscal stimulus implemented by governments induced high global debt and threatened the stability of the global economy and international finance.

In conclusion, the global economy, international trade and FDI will show moderate and simultaneous growth in 2017. But there is still a long way to go for a complete recovery, and national macroeconomic policies still face uncertainties.

The author is a researcher with the China Institutes of Contemporary International Relations

Copyedited by Bryan Michael Galvan

Comments to liuyunyun@bjreview.com

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