Persistent weakening of global growth weighs on global economy

We can now see clearly that there will be an overall slowdown in global growth from 2012-13 that can be explained by many contributory factors ― it is by no means only because of the eurozone crisis. While the International Monetary Fund until recently expected growth in global gross domestic product to come in at 3.9 percent in 2013 and 4.5 percent in 2014, global growth is in reality likely to remain between 2 and 2.5 percent for these two years. What factors can explain this prospect of weak global growth?

Firstly, are the restrictive fiscal policies that continue in Europe and will appear in the United States in 2013, involving government spending cuts. Also, in Japan there will be a VAT increase in 2014. Secondly, amid the ongoing eurozone crisis, there is a need to improve the level of production sophistication in many economies, which is a lengthy process. Lastly, are long-term structural problems in the major emerging countries: China’s loss of competitiveness due to a rapid rise in unit wage costs within its industry, which has brought them to 65 percent of their US level; stagnation in Indian industry because it is impossible to find sufficiently skilled new employees; and major weakness in the Brazilian economy as a result of the substantial overvaluation of the exchange rate.

Global trade is now stagnating, and this transmits slowdown to all open economies in Asia and Central Europe.

This prospect of persistently weak growth in the global economy should lead us to question certain assumptions and trends, previously perceived as givens, and therefore to change our conventional thinking.

First of all, and contrary to widespread belief, it is not at all certain that commodity prices, and in particular oil prices, will be very high in 2020. Conventional wisdom has been that global demand for metals and oil would perpetually grow faster than production capacity, leading to surging prices. But we can now see that metal consumption has increased by only 1 percent in a year in China, versus more than 10 percent on average, and oil consumption has increased by only 2 percent in the same time, versus 9 percent on average. Eventually, there will be substantial unused production capacity for commodities, leading to a downward trend in prices. Oil prices are currently underpinned only by geopolitical risk.

The second challenge to conventional thinking is that Chinese growth is not going to remain strong and the Chinese market will not remain a buoyant market for European, U.S. or Asian companies. If China’s gross domestic product was measured according to international standards, we would see that its growth is in reality only 3 to 4 percent due to the loss of cost-competitiveness, the continuous rise in household savings, and the 7 percentage point decline in companies’ capital expenditure in one year as profit margins were squeezed.

Lastly, in this environment, monetary policies will remain expansionary for a long time to boost economies, help finance fiscal deficits in the United States, Europe and Japan, and to try to drive down exchange rates in the United States, the United Kingdom, Switzerland, Japan and emerging countries. There is even talk of a currency war.

Therefore, it is time to change our conventional thinking in this environment of persistently weak global growth.