Chen Wenling: Global Economic Trends in 2018

1. After hovering at the bottom for about 10 years, the world economy has finally reached a turning point. The international financial crisis has basically ended and the world economy has gradually entered a long-term period of recovery.

It was estimated that the global economic recovery will start to speed up from 2017. According to OECD’s forecast, the global economic growth will reach 3.34% and 3.59% respectively in 2017 and 2018. IMF’s data of October this year indicates that the global economic growth will reach 3.6% in 2017 and 3.7% in 2018, as accelerated economic growth will emerge in two thirds of the countries worldwide, the largest increase in the past decade. The rapid global economic recovery can be attributed to two major factors: the first one is the recovery of international trade. In 2016, the global trade volume increased by 2.4% and is expected to reach 4.2% and 4.0% in 2017 and 2018 respectively. The second reason is the expectation that emerging economies and developing countries will continue to maintain strong growth. According to the IMF, the economic growth of emerging economies and developing countries will reach 4.6% in 2017 and 4.9% in 2018, much higher than that of the global economic growth in the same period.

2. The quantitative easing monetary policy adopted by many countries is ended. The US interest rate increase symbolizes that the world economy will slowly enter a cycle of increasing interest rate, reducing debt and leverage.

The United States and many other countries have implemented quantitative easing policy after the breakout of the international financial crisis, which has dramatically raised the balance sheet of the Federal Reserve from 800 billion dollar before the financial crisis to about 4.5 trillion today. From October 2017, the Federal Reserve has started the debt relief process. According to the plan made by the Federal Reserve in June this year, the total debt amount will be controlled at about 3.3 trillion by 2020. More importantly, many other countries will follow the US and hence, the world will enter a new cycle of increasing interest rate and leverage.

3. In the future, the price of the global commodity will fluctuate within a reasonable range.

Due to various factors such as the weak demand for global energy, excess liquidity in major currencies, the shale gas revolution in the United States and the substantial increase in oil production by the Organization of Petroleum Exporting Countries (OPEC), the price in global energy market has experienced dramatic fluctuation since the breakout of the global financial crisis. Starting from the end of 2016, however, the international oil price has gradually stabilized and maintained at 50-60 dollar per barrel. In the future, the price of crude oil will continue to fluctuate within this range and the price volatility is unlikely to emerge due to three reasons.

Firstly, the cost of shale oil production in the United States has become more stable. After three years’ adjustment, the cost of shale oil production in the United States has dropped to about 35 dollar per barrel, and in some areas the price even reached 20 dollar. The cost-plus pricing based on the breakeven of the US shale oil will become an important “stable anchor” affecting the global oil price. Secondly, the limited production of OPEC will become another “stable anchor.” Recently, the King of Saudi Arabia reached a new agreement with Putin during his trip to Russia, extending the limited oil production to the end of 2018, which means the oil price will be relatively stable in the next two years. Thirdly, China is playing an increasingly important role in stabilizing the price of crude oil. For instance, China is actively promoting the RMB denominated futures contract for crude oil, which can also be converted into gold and is expected to be launched by the end of this year. Furthermore, China is negotiating with Russia, Iran, Saudi Arabia and Venezuela on RMB-denominated oil import and thus, the RMB will become an important stabilizer of the global oil price.

4. New technologies, new economy and new industries continue to emerge and provide the new momentum for global development.

All countries have implemented strategies to pursue innovation in various fields and are trying hard to provide new momentum for future development, which can be illustrated in three areas. The first one is intelligent manufacturing. Many countries have put forward intelligent manufacturing as an important direction for future development, such as the industry 4.0 in Germany, the Internet manufacturing in the United States, smart manufacturing in Japan and “Made in China 2025” in China. Secondly, the rapid development of new technologies such as Internet, the Internet of Things, artificial intelligence, cloud computing, cloud services, big data and communication technologies. Thirdly, the cross-border e-commerce is gradually taking shape and will flourish quickly, which is likely to trigger profound changes in manufacturing, trade and service industries. The global industrial chain, value chain, supply chain and service chain will experience significant restructuring.

(5) China is playing a more important role in the global economy and will be a key force in stimulating the vitality of the world economy and reshaping global economic rules.

China’s role in the global economy can be summed up in the following five aspects. Firstly, China has become a vital force in the global stage. China’s share of the global economy has risen from 11.4% in 2012 to 14.8% in 2016, and become the second largest economy in the world, the largest exporter of goods, the second largest foreign direct investor and the largest holder of foreign exchange reserve. Secondly, China has made some valuable proposals. China has put forward quite a few major initiatives and programs such as the Belt and Road Initiative, the Asian Infrastructure Investment Bank and the Community of a shared future for all mankind. China will continue to play a leading role in the future global development. Thirdly, China has set a good example for the rest of the world as it has assumed more and more international responsibilities in such areas as poverty alleviation, climate change, and the restructuring of multilateral trade and economic rules. Fourthly, China has become an essential force driving global development. China has enjoyed rapid economic growth for more than 40 years. If China retains its medium and high-speed growth of 5% for another 10 years, it will become a miracle in the history of world economic development. Fifth, China is very open-minded and aimed to create a better world. China’s initiatives and practices are totally different ideologies that are designed in the best interest of all mankind and conform to the trend of the times. This is completely different from isolationism, particularism and conservatism.

Contradictions and problems in the new era

The first problem is the huge gap between the rich and the poor people. The return on capital investment is much higher than the income of the workforce, which has enlarged the rich-poor gap globally. The second problem is the contradiction between the north and south. Although the proportion of advanced economies in the world economy is steadily declining, they continue to dominate the making of the international rules, standards and governance, which does not reflect the interests of the developing countries. The third problem is the transformation between the new and old momentum. The Internet revolution initiated a brand-new era and have brought ubiquitous and irreversible influences on all aspects of the economy and society. However, the old mentality and outdated management methods still hinder the development of the new economy. Fourthly, the contradiction between low economic growth and high debt. The current global government debt is already close to 70% of the global GDP, and the total global government and non-government debt will reach US $ 217 trillion this year, up 50% than a decade ago. Fifthly, the contradiction between economic globalization, regional economic integration and the current isolationism, protectionism and secessionism. Sixthly, the contradiction between virtual and real economy. The seventh problem is the conflict between different cultural civilization and values. Lastly, the competition between different big powers. Big nations will compete for the world’s leading position, however, they will also cooperate with each other whenever it is necessary.

In recent years, the　following variables are likely to have an impact on the international economy.

First, the trend of anti-globalization continues to rise. From the Charlottesville riot to the shooting in Las Vegas, we can see that the extreme populism and white supremacist is on the rise in the US. The sharp “right turn” in the European politics, the Brexit, the fact that Le Pen almost become the French president, and other rightist ideological trend will bring great uncertainty to the world economy.

Second, the global financial risk brought by the QE exit. During Yellen’s leadership, the US Federal Reserve has started to increase interest rate gradually. When Powell become the head of the Federal Reserve, he is likely to continue Yellen’s policy. Having considered the fact that the Federal Reserve has set a limit on the reduction and they have enough buffering time, the liquidity of the market will not be affected drastically in the short term, but we should keep a close eye on the impact on the global economy upon the exit of QE in the long term.

Third, some major economies may experience unpleasant fluctuation. Abe’s government has always wanted to raise the consumption tax from 5% to 8%. However, the plan has been postponed due to the economic downturn, the launch is likely to cause an economic recession in Japan and even affect the global economic recovery. Last year, India’s economy did a good job. In November 2016, however, Indian Prime Minister Modi suddenly promulgated the “Currency ban”, which plummeted the economic growth in the fourth quarter. This year, India has proposed to scrap gold supply, which may also affect India Economy adversely.

Fourth, regional wars and conflicts. At present, some regions of the world are in war while some other areas are on the brink of war. Issues like the ISIL, the DPRK nuclear, the Iranian nuclear program, if not well controlled and resolved, they will most likely to trigger refugee crises, currency crises and regional economic crises, which will then affect their neighboring countries and the global economy as a whole.

Lastly, the elections across the world. There are many presidential elections around the world in 2017 and 2018. About 35% of the world’s nations held general elections in 2017 and the figure will be 20% to 30% in 2018 and consequently, unexpected events can easily occur to impact the global economy.