Chen Wenling: Five Major Trends of the World Economy in 2018

In 2018, the world economy will face the following five major trends.

First of all, the world economy has seen a clear but weak turning point after stumbling at the bottom for a decade. The international financial crisis has basically ended, and the world economy has gradually entered a long period of recovery.

From 2017 onwards, the global economic recovery has started to accelerate, and the global financial crisis has basically ended.

The rapid recovery of the global economy has benefited from two factors: first, the recovery of the international trade. After the financial crisis, the slow economic growth in some major economies led to a lower demand and the rising global trade protectionism have caused a negative impact on international trade. After 2008, the growth of international trade has always been lower than the economic growth. According to the data of the IMF in October, the global trade volume in 2016 only increased by 2.4%. It is expected that the growth rate in 2017 and 2018 will reach 4.2% and 4.0% respectively, and the recovery of international trade will become an important force driving the global economy.

The second reason is that the emerging economies and developing countries will continue to maintain strong growth. According to the IMF’s forecast, the economic growth rate of the emerging economies and developing countries will reach 4.6% and 4.9% in 2017 and 2018, much higher than the global economic growth over the same period, especially the BRICS countries. After the financial crisis, China has become the main driving force for the global economy as its contribution to the world economy reached 50%, and the average value in the past five years also reached 30%. It is expected that the Chinese economy will continue to maintain a steady, medium and high-speed growth in the next two years. India is also one of the fastest growing major economies in the world economy. Thanks to the recovery of commodity prices, Russia and Brazil will also get out of the recession soon. In addition, some other developing countries such as Indonesia, Thailand and Vietnam have also maintained fast economic growth in recent years. Although the economic growth in developed countries has generally increased slightly, their economic performance, however, is far not as good as the developing countries.

Secondly, the global quantitative easing monetary policy is basically over, and the interest raise in the US symbolizes that the world economy will gradually enter a cycle of interest rate/debt-reduction and de-leverage.

After the breakout of the global financial crisis, all countries in the world have adopted the quantitative easing monetary policies. In order to boost the economy and resolve the problems of subprime mortgages, the United States successively implemented four rounds of quantitative easing policies during the financial crisis. By purchasing government and institutional bonds, the United States increased the money supply, lowered interest rates, and expanded the scale of the Federal Reserve’s balance sheet. Japan, Europe, and other economies also followed the suit one after another, putting massive liquidity into the international market. Quantitative easing, as a large-scale monetary stimulus policy, has played an important role in pulling the world economy out of the quagmire. However, this is not sustainable in the long-term. Since February 2014, the US Fed has reduced its purchase of assets by 10 billion dollar each month. At the end of October 2014, the Fed announced the end of the quantitative easing. In December 2015, the Federal Reserve raised interest rates for the first time since the financial crisis, raising the federal funds rate by 25 basis point to tighten its monetary policy. Since then, it has initiated interest rate increases for several times.

The quantitative easing monetary policy has greatly increased the scale of the Fed’s liabilities, which has risen from USD 800 billion before the financial crisis to the current USD 4.5 trillion. Since October 2017, the Federal Reserve has started the debt reduction process. According to the reduction plan made by the Federal Reserve’s meeting in June 2017, a modest and gradual contraction will be adopted. Other countries are expected to follow the suit after the Fed starts to launch the contraction program. At present, the economy in the euro zone has experienced a strong recovery and many members of the European Central Bank, including Draghi, agreed to phase out the QE program. When the inflation indicators start to rise, the euro zone will start to withdraw from the quantitative easing. Due to a sluggish economy, Japan has not announced any plan to tighten its monetary policy, but sooner or later, it will have no choice but to take the same action. The growth of China’s currency issuance is also slowing down. At the end of September 2017, China’s M2 increased by 9.2% year-on-year, a decrease of 2.3 percentage points from the same period of last year, and the monetary policy is becoming more stable and neutral.

Thirdly, the era of a skyrocketing and plummeting commodity price has ended. In the future, commodity prices will fluctuate within a wide range.

The crude oil price is a major reflection of the commodity price because the change in crude oil prices reflects the global trend of commodity price. Since the end of 2016, the international oil price has become stabilized and gradually fluctuates around 50-60 dollar per barrel. It is expected that the global crude oil price will continue to fluctuate along this level due to the following three “stabilizing anchors.”

First, the cost of shale oil production in the United States has been stabilized. The US energy revolution is the biggest change in the global energy sector in recent years as it has changed the supply and demand pattern of the global energy market. Furthermore, the energy revolution has increased the production of US shale oil, and the US crude oil production has also increased rapidly, which has now reached nearly 16%, making the US one of the world’s major oil producers. In response to the expansion of shale oil production, the OPEC has started to expand production since 2014, resulting in a rapid decline in global crude oil price.

Second, the OPEC production restriction will become another “stabilizing anchor.” After OPEC increased production in 2014, the global oil price plummeted and the OPEC itself also became the victim of resulting lower price. Considering that the United States has become a major energy supplier, the OPEC member states reached a production restriction agreement in September 2016. From November 2016, all the member countries agreed to limit OPEC production to 32.5 million barrels per day. Russia has also actively joined the production restriction. Recently, the Saudi King visited Russia and reached a new limited production agreement with Russian president Putin, to extend the restriction to the end of 2018, which implies that the global oil price will remain stable for quite some time in the future.

Third, China is playing an increasingly important role in crude oil pricing. China has now surpassed the United States to become the world’s largest importing country of crude oil. Ensuring a smooth importing channel and stable crude oil prices are essential for China to maintain a steady and sustainable economic growth. As China increases its discourse power in the importing market of crude oil, it also actively participates in or even dominate the pricing of international crude oil. At present, China is actively promoting the crude oil futures contracts that are denominated in RMB and can be converted into gold, which is expected to be issued in the near future. At the same time, China is negotiating with Russia, Iran, Saudi Arabia, and Venezuela to discuss the possibility of pricing the petroleum imports in RMB, which will not only weaken the dollar hegemony and promote the internationalization of the RMB, but also stabilize the global oil prices indirectly. By doing so, China will be able to prevent the adverse impact caused by the volatile oil price to its domestic economy.

The fourth trend is that the global transition from old to new kinetic energy, and new technologies, new economies, and new industries have emerged and flourished.

The innovation strategy has become the common need of all countries in the world, and the global transition of new and old kinetic are mainly reflected in the following three areas. The first is smart manufacturing. All countries have proposed to make intelligent manufacturing an important direction of their national development in the future, such as German Industry 4.0, the US Internet Manufacturing, Japan’s Intelligent Manufacturing, and “Made in China 2025”. Russia and India have also put forward their own smart manufacturing strategies. Intelligent manufacturing will become a new momentum for national economic development.

The second factor is the new generation of information communication and data technologies such as the Internet, Internet of Things, artificial intelligence, cloud computing, cloud services, and big data. Relying on the technological revolution, everything will be interconnected; the artificial intelligence, big data, cloud computing, and cloud Service technology will make everything intelligent. The smart society is coming and the physical and the digital world will be deeply integrated. China has developed rapidly in these areas and is gradually changing from being a starter to a global leader.

The third factor is the constant emergence of new economies, new models, and new business. Under the conditions of technological innovations such as global interconnection, big data, and cloud computing, the E-international trade is gradually taking shape. It has triggered a profound change in manufacturing pattern, trade pattern, and service pattern. The global industrial chain, value chain, supply chain, and service chain are all facing reorganization and new links and layouts will emerge in the global manufacturing industry. Overall, the E-International Trade will become the next generation trade and lead the future.

The Chinese factor is becoming more and more important in the global economy and will become a key force in stimulating the vitality of the world economy and reshaping global economic rules.

The fifth trend is that China’s role in the global economy can be summarized in five terms, Chinese power, Chinese solution, Chinese model, Chinese momentum, and Chinese style, more detailed can be explained as follows

Chinese power. The Chinese economy has maintained rapid growth and become the world’s second-largest economy, the largest exporter of goods, the country with the second largest foreign direct investment and the largest foreign exchange reserve. According to the Associated Press, China was only the largest trading partner of 70 countries in 2006, the figure for the United States was 127. Now China has become the largest trading partner of 130 countries, and the United States has dropped to about 70. China’s manufacturing industry accounts for 25% of the world’s total, its trade accounts for 15%, and the RMB accounts for 10.98% of the SDR currency basket.

Chinese solution. In 2013, China put forward the Belt and Road initiative. On May 14, 2017, the Belt and Road Forum on International Cooperation was held in Beijing, and more than 1300 delegates from 138 countries and 70 international organizations participated in the forum. China’s Chairman Xi Jinping delivered an important speech and systematically reviewed the achievements the initiative has made over the past four years. The United Nations Secretary-General Antonio Gutierrez said that the Belt and Road proposed by China is the same as the goal of the UN Sustainable Development Plan for 2030, which can be seen as a public good that China provides to the world.

Chinese model. As China’s economy continues to grow, it is also taking on more international responsibilities. For example, China will build a well-off society in an all-around way and achieve zero poverty across the country by 2020, which can be seen as China’s major contribution to the world’s poverty reduction. While Trump announced that the United States will withdraw from the Paris climate agreement, China expressed that it will continue to fulfill its commitments, unswervingly safeguard the multilateral system and the hard-won global consensus, making it a role model for other countries.

Chinese momentum. China has maintained 40 years of rapid growth since the reform and opening up. If China continues to maintain a growth rate of 5% or more for another 10 years, it will be a miracle in the history of world economic development.

Chinese style. The General Secretary Xi Jinping pointed out that China will never seek hegemony and never engage in expansion regardless of its level of development. China upholds the concept of global governance based on common development, and cooperation and advocates democratization of international relations. We must engage in dialogue not confrontation, promote companionship not alliance. China’s initiatives and practices reflect a high level of morality, which is a completely different ideology from isolationism, conservatism and self-centered nationalism.