Story Of The Week

A revival in Global Economy

 

The period from December 2007 through June 2009 saw a tremendous recession on the Global Economy. The housing market moved from a boom to a bust. The economic bubble burst. This lead to a humongous job loss, inequality of wealth and loss of investments.

The negative scenario, widely known as the Great Depression continued for a long duration. When the crisis ended, the shock was so prevalent that the economies took years to recover.

The recent years have shown a revival in the global economy. However, the speculations have presented varied opinions. This article aims to discuss the parameters that helped in reviving the global economy in the last few years and the reasons for the negative speculations lately.

Introduction

There have been a variety of factors that have impacted the global economy.  Some of the major factors include low-interest rates, the rise in oil prices, low unemployment and the trade changes.  

According to the recently released World Bank data, the global economy is expected to expand 3.1% in 2018. Faster than the last year’s growth rates of 3%.

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Global Growth( From World Bank Report)

Since the financial crisis, for the first time, the world has been “Running at its full Potential”.  Right now, there has been more demand due to the high productivity and low unemployment.

However, this may just be a one-year scenario. The growth is expected to start falling in 2019. According to the World Bank reports, about two-thirds of the global economy may fall. The fall may be due to slowdown due to end of stimulus measures, quantitative easing etc.

Further, the World Bank predicts a “broad based cyclical upturn”, stating no time for complacency and giving warnings about the future. 

Let us discuss the factors in detail which have helped in growth of the global economy

Aging Perspective

The world is moving towards a population with high average expected age. The world bank suggests the economies that make up 65% of global economy to be affected by the age factor. This is expected to take away some portion of economic growth in the coming time.

According to Investopedia, as the proportion population in areas of Western Europe, North America and japan would age, this would lead to several interrelated issues. This includes a sharp fall in the working- age population leading to declining productivity, high labor costs ,reduced international competitiveness increasing costs of pension commitments, increased healthcare and medical costs etc . Thus, the demand drivers in the Economy will change, leading to significant pressure on the Economy and the change in Living Standards.

 

Interest Rates

In the aftermath of 2008 financial crisis, the central banks across the world have slashed their interest rates to large extent. Thus interest rates approached near zero level. In fact, countries like Japan and Switzerland have implemented negative interest rates to improve the economic growth.

After all these years, the economy of the world is moving on the growth path. In the wake of this growth, it is expected that the central banks will hike the interest rates and move away from easy monetary policy in the coming years. Also this will help to squeeze the asset bubble that was created between these years.

Last year, the European Central Bank(ECB) reduced bond buys to €30 billion a month. Even Japan joined this league recently by cutting their long dated bonds buys. But Japan’s ultimate target is inflation which is currently below Bank of Japan’s 2% target.

If we talk about US, the central bank Federal Reserve has raised interest rates last month by 25 basis points. Post the financial crisis, this hike is just the fifth time. On the other hand, India has maintained status quo on interest rates in December.

Oil Prices

The recession in 2008 deteriorated the demand for crude oil. However, the recovery in the economy set the oil prices above $100 a barrel in the later years. But things changed completely in 2014. The increased supply of crude oil with huge supply from OPEC and the US brought the oil prices below the $30 mark.

Then OPEC decided to cut the oil output and this was extended until the 2018 end recently. This contributed to bring the oil prices back to $70. With the increasing economic growth across the world, the demand for oil may also result in higher oil prices in the coming months.

On the other hand, there is this key factor that may impact the oil prices and may lead to unexpected fluctuations. It is the competition between the US shale oil and other crude-producing countries. The prices will be dependent on production and changes in the Oil industry.

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 Commodity price indexes ( From World Bank Report)

Low Unemployment

It is expected that the unemployment rate in developed countries will fall to its lowest rate since the 1980s. This is one of the reasons behind the central banks moving away from the easy monetary policies in their countries. This falling unemployment can boost the consumption and thereby the economic growth.

Turnaround in Trade

According to the World Bank’s Global outlook, in 2017, the report states, the global trade strengthened significantly, benefiting from a recovery in manufacturing and investment growth.

Further, the report considers the Trade Volumes that have picked momentum since 2016, sustaining through 2017. Exports growth has increased in all the EMDE regions (Emerging Markets and Developing Economies: Include the regions in the Low income Developing Countries).

However, exports have decelerated in the Middle East and North America partly due to the oil export cuts by OPEC.

The recovery in global trade has been due to a cyclical upturn in global manufacturing, which was encouraged by better capital spending. Services trade recovered at a slower pace as compared to goods.

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Global goods trade growth ( From World Bank Report)

In the coming years, the global trade is expected to remain constrained due to the relatively slow pace of integration in  Global Value Chain and Trade Liberalization.

Conclusion

To sum up, the world needs to be cognizant of the constraints that impede future growth. Though there have been various factors leading to an improved growth, there are many that may deteriorate it in future. This is a time to celebrate the next year, keeping in mind the risks and constraints the developed counterparts are going to face, and the struggle they may face due to continued disintegration of the Global Markets, the unpredictable oil prices, widely persisting unemployment and aging of population.

 

References

http://money.cnn.com/2017/10/26/news/economy/ecb-taper-stimulus-bonds-interest-rates/index.html?iid=EL

https://www.bloomberg.com/news/articles/2018-01-10/boj-tightening-to-begin-sooner-than-expected-sinai-says

http://money.cnn.com/2018/01/10/news/economy/world-bank-global-growth/index.html

https://qz.com/1176396/world-bank-permanently-lower-your-expectations-for-the-global-economy/

https://www.businessinsider.com.au/airline-industry-growth-economic-indicator-2018-1

https://openknowledge.worldbank.org/bitstream/handle/10986/28932/Global-Economic-Prospects-Jan-2018-Ch1.pdf

 

 

 

 

 

 

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