“Secondly, there is great concern and much uncertainty about the implications of the Trump government for the global economic and geopolitical order. This uncertainty has been fueled by his statements during the election campaign and his acting as President …”
A couple of weeks ago, the joint World Bank and International Monetary Fund (IMF) spring meeting was held, at which time the IMF biennial report on the Economic Outlook of the World Seminars on the state of the economy and the global financial systems and their perspectives were also developed.
Of the issues treated, I think it is important to highlight three. First, a scenario of global growth is consolidated for this year and next, higher than that achieved in 2015.
Second, there is great concern and much uncertainty about the implications of the Trump government for the global economic and geopolitical order. This uncertainty has been fueled by his statements during the election campaign and his acting as President. There were also concerns about the rise of populism in Europe and its consequences for the stability of the euro area and the European recovery.
Third, despite the recent cyclical upturn, the medium-term global growth scenario is not auspicious, mainly because of the significant drop in productivity in both advanced and emerging countries. I will now turn to these three points in more detail and analyze the implications of this scenario for Chile.
Short-term global growth prospects
The tenor of discussions on global short-term growth was much more optimistic than in previous years, which is not surprising given that, following continued downward revisions in world growth projections over the past six years, this Year, the WEO revised its growth forecasts for the year 2017 and maintained those of 2018, compared to what was estimated last January.
These projections and others, such as the Consensus Forecast, confirm that the cyclical recovery of the global economy has been taking hold. This recovery is quite widespread, although the euro zone and Japan stand out, which have surprised with more dynamism than expected after years of low growth and very low inflation. It also highlights the United States, a country that has practically returned to full employment, reached a product level around its potential and whose inflation approaches the two percent annual goal.
The recovery of the euro zone has been driven by more favorable financial conditions – a product of the European Central Bank’s policies and the gradual improvement of its financial system -, the significant fall in the unemployment rate, the improvement in the Consumers and entrepreneurs (the latter are at the highest level in 10 years), and the depreciation of their currency.
Japan’s recovery, meanwhile, is supported by expansive fiscal and monetary policies, a robust labor market, and the depreciation of the yen.
In the United States, for its part, the recovery is based on an expansive monetary policy, the increase in wealth resulting from the rise in property prices and stock and bond values in a more dynamic labor market, and In the best expectations of consumers and entrepreneurs.
On the other hand, the economic outlook for the emerging world has also improved. China, which is the largest emerging economy and second largest economy after the United States, by size, has grown more dynamically than projected in the last two quarters as a result of expansive fiscal and credit policies. However, China remains concerned about the experts, and holding their authorities, for the strong growth of credit to local governments and public enterprises.
The rest of the emerging countries, as a group, are benefiting from the cyclical recovery of the advanced countries, the maturation of internal adjustment processes to face the end of the commodity super-cycle, better prices for primary products and conditions International financial institutions that remain favorable.
Concerns about the global economic and geopolitical order
As for the international economic and geopolitical order, the behavior of the Trump government and the rise of populism in Europe are of concern. In particular, there is concern about the risk that the United States will abandon the central role it has played since the Second World War in promoting trade multilateralism and international geopolitical order. They are also concerned about the Trump administration’s protectionist leanings and actions, for its consequences on the rules of global trade and, ultimately, on growth itself.
Other sources of concern and uncertainty include the rise of populism in Europe, which could be voiced in France and in the next parliamentary election in Italy, the Brexit negotiations and political tensions in the Middle East, North Africa and Peninsula of Korea.
Perspectives of global growth in the medium and long term
Regarding medium- and long-term global growth prospects, the concern is that, after this cyclical recovery at rates of growth that in many cases exceed their potential level, world growth will be mediocre. This, as a consequence of the fall in productivity, in both advanced and emerging countries. This fall in productivity has a share associated with the legacy of the Great Financial Crisis – companies and banks with weak balances, low investment levels, greater preference for investment in more liquid assets and a drop in the advance of technological change incorporated in Capital, as well as more structural factors that come before.
These structural factors are the aging of the population, a lower rate of accumulation of human capital, the maturing of the process of China’s integration into the world economy, the fading of earnings associated with information and communication technologies Of the IMF of Adler et al., 2017). In this scenario, the central message was that, in particular, emerging countries can not expect that the highest growth projected for this year and next will be maintained. Moreover, in China, policies aimed at controlling excessive credit growth will eventually reduce growth. For this reason, these countries have to focus, now more than ever, on their efforts to create more conducive internal environments for the expansion of investment and productivity, and thus to underpin their potential growth.
Implications for Chile
In this unfavorable scenario for future world growth and with great uncertainty about the global economic and geopolitical order, Chile can not expect favorable wind from outside to inflate the candles of growth. If we are to resume growth rates of around 4 percent per annum, we must focus more than ever on reducing uncertainty and the innumerable internal barriers to investment, employment and productivity increases.
Economic growth is fundamental to the well-being of the population and, in particular, to maintain the great progress that the middle class has made in the last 30 years and to be able to finance social protection programs. The list of policy adjustments to achieve such goals is long and I have already referred to them in previous columns. The challenges for the final stretch of President Bachelet’s government and for the candidates to succeed it are clear, it is only to be expected that the programs and plans will take charge of implementing them, leaving aside voluntary visions and short-term visions.