State of the World — Looking Further

*This is the second part of a two part-series exploring global economic conditions. Find a link to the first part here: State of the World– An Economic Overview*

Besides the changes noted earlier, normalization efforts are also increasing the cost of US debt and increasing the interest payment of the government. With budgetary deficits increasing driving by increases in spending and the normalization efforts of the Fed, interest burden is expected to sky rocket. As per the data released by the Treasury department, the US government paid $523 billion in gross interest payment in fiscal year 2018. This is a 14% increase in the prior 12-month period and the highest on record. To put things in perspective, this figure is higher than the GDP of countries such as Sweden, Norway, Poland, Belgium and many others.

Further, demographic changes have been playing a major role in driving changes in the pattern of economic growth. With ageing populations in advanced countries, the nature of consumption are changing. These will reflect in the growth figures as well as financial choices. We are entering a world where geopolitical risks are rising and will increasingly drive business conditions. It is expected that these will reflect in the growth numbers in the coming quarters and may persist. Such a tensions combined with economic fundamentals and the prospects of a long pending business cycle correction makes the risks of a recession elevated. This also influences the magnitude of the correction.

With the benefits of globalization not being felt by all and changes in technology driving employment patterns, aspirations of the people are being translated into political choices. These choices are raising protectionist tendencies across the world as employment generation becomes critical. These protectionist tendencies have the potential to disrupt global supply chains built over the last few decades and limit technology related transfers. These could reflect in price changes that could be detrimental to the political base driving these moves.

Ensuring and delivering inclusive growth will be important for governments across the world. Countries have been making policies to ensure more inclusive growth. Even in China, the government has cracked down on corruption in order to ensure better governance at the local level. During the positive growth in the last few years, countries have continued to run deficits. In the event of a crisis, the ability of a government to muster resources will be crucial to ensure expansionary policies then. Fiscal buffers needed to strengthen financial conditions are important.

Growth momentum in advanced economies slowed down earlier this year having peaked last year. Global trade and industrial production have declined with the dynamics of inflation taking on different forms in different economies. The euro area and Japan have struggled to meet their inflation targets while the US and UK are relatively more comfortably positioned. Emerging markets see a different set of factors driving core inflation but has remained positive. A few countries such as Turkey have seen growth decline. Venezuela remains an outlier with a decline in growth and sky rocketing inflation caused by scarcity. Growth across the emerging world is not expected to be uniform. While Asia and pockets in Europe are favourably positioned, the outlook for the Middle East and Latin America aren’t as positive.

There are more down side risks weighing on the global economy with very few factors making the case for an upside position. Trade policies have seen a marked divergence from multilateralism followed in the recent past. Perhaps the rise of bilateral trade policies will emerge in the coming years to replace the rules based order established. Tariffs and retaliatory tariffs haven’t made the prospects for a return to a multilateral and rules based environment easier. With such risks looming, coordinated and cooperative efforts would be needed to ensure global growth (and recovery in the event of a crisis). It isn’t just trade that is impacted but larger issues such as taxation, migration, climate change and other that also get affected while pursuing protectionist policies. Issues such as cyber security are also global and require cooperation.

Debt is perhaps the biggest challenge being faced by all countries across the world. While during the Great Recession, governments were able to expand their balance sheets and take on debt, there may not be enough room to take on more should there be a downturn sometime in the near future. It is important to recognize here that downturns are a natural part of the business cycle and not an alarmist call. It is the severity that is different and determined by various factors. Countries have taken on excessive debt to fuel growth in the past decade. Low income countries will find it excessively challenging to manage their debt at such high levels.

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