Emerging economiesā growth strategies and outlooks
The real economic GDP (gross domestic product) growth of the various emerging economies as a whole has continued to outpace the GDP growth rates of the developed countries globally. However, there has been some deterioration in the economic growth of some emerging economies over the past few years. This is reflected by the gradual slowdown of the combined real GDP growth rates of the main emerging economies, China and Asia, from 7.3 per cent in 2010 to 4.4 per cent in 2014. The key strategic factors responsible for the observed slowdown in economic growth of emerging economies are both cyclical and structural.
The cyclical economic challenges to emerging economies include the gradual withdrawal of policy stimulus after the 2007ā08 financial crisis by various central banks, plus the excess capacities created by the pre-financial-crisis boom. In addition the expansionary monetary and fiscal policies that were implemented by various governments to mitigate the financial crisis also added to the cyclical challenges. The weaker global export markets with lower amounts of international trade have also affected some emerging economies adversely. Weaker and declining commodity prices have led to the end of the commodity supercycle globally. This has seriously affected the economies of the key commodity producing and exporting countries.
Continued risk aversion and reduced investments have persisted after the financial crisis. The major structural weaknesses of the emerging economies are slower labour force growth, pace of globalization and progress on key structural reforms. These cyclical challenges to the various key emerging economies are generally expected to diminish gradually as the global economy gathers momentum and returns to its normal pace over time. Appropriate fiscal and monetary policies by the governments of the various emerging economies should make the transition smoother. In particular, building fiscal surpluses, reducing fiscal deficits and keeping inflation under control should allow emerging economies to respond more effectively to difficult future financial conditions. There will also be lower capital inflows as the economic recoveries in the developed countries, especially the US and UK, gather pace.
In contrast, the structural deficiencies of emerging economies will require the implementation of vigorous structural reforms. Indeed, it is the speed, scope, strength and robustness of structural reforms by their governments that will determine the long-term growth potentials of the emerging economies. Fortunately, most emerging economiesā governments understand the importance of structural reforms and are already in the process of implementing them. Obviously, the structural reforms required to improve the growth potentials of emerging economies will differ from country to country but the thrust will be similar. These key structural reforms will include allocating capital more efficiently, raising overall productivity, strengthening growth potentials and making growth more sustainable. Emerging economies that have improved their economies with structural reforms will also be able to continue to attract higher FDI (foreign direct investment) than other countries.
Lower oil prices are currently offering a window of opportunity to emerging economies to implement their long required oil subsidy reductions and energy tax reforms, particularly in various oil importing and exporting economies. These reforms should also increase their fiscal resources, which can then be used to implement other counter-cyclical fiscal policies during future economic slowdowns. The savings can also be utilized for targeted pro-poor spending or public investment, particularly in new infrastructures. It is generally expected that emerging economies will be able to successfully implement their structural reforms so they can continue to be the worldās economic growth leaders. As a result, the real GDP growth rates of emerging economies are expected to gradually increase from 4 per cent in 2015 to 4.9 per cent in 2016, and then to rise to 5.7 per cent in 2020. During this period, the emerging economiesā growth rates will continue to remain higher than the global average and the developed countriesā economic growth rates. The potential risks to emerging economiesā growth include sudden reversals of capital inflows to emerging economies and disorderly and sharper than expected slowdowns of the Chinese economy plus a lack of progress on structural reforms in emerging economies. However, the probability of these risks materializing is low with the reforms and progress made by the emerging economies.
Global economiesā growth strategies and risks outlooks
In 2014, there were reasonable economic performances in the major economies of the US, UK and some Asian emerging economies, in particular the ASEAN economies. However, the global real GDP growths still remained subpar at 2.6 per cent in 2014. This was caused by various global economic developments including the Eurozone and Chinese economies slowing down, plus Japan falling into another recession. In addition the Latin American economies decelerated, with Argentina, Venezuela and Brazil falling into recessions. The Russian economy has also contracted primarily due to capital flights and the Ukrainian sanctions imposed by the US and EU. In addition, the economies of India, Turkey, Mexico and South Africa also did not fully regain their lost momentum.
A closer examination of the composition of the world real GDP growth rates revealed that these remained subdued in 2014. This was mainly due to the declines in global investments and private consumption growth plus cautious government expenditures with only a modest improvement in exports and global trade. Looking ahead it is generally expected that while the economic activity in some developed countries, particularly the US and UK, will continue to remain strong, the growth in many other developed economies, particularly the Eurozone and Japan, and in some emerging economies may well remain weak. The Chinese economy is likely to decelerate to sustainable growth rates as a result of the governmentās new economic reform policies.
The dramatic fall in oil prices globally will benefit the net oil importers. However, it will hurt net oil producers, particularly the ones with high fiscal breakeven points, for some time. In addition, the boost for net oil importers will come at the expense of net oil exporters. It is also generally expected that the declines in energy and raw-material prices on the global economy will be significant but manageable. In addition, sizeable uncertainties about future pricing trends are adding new risks.
The sharp declines in global oil and gas prices, softer commodity prices and moderate global demands will help to keep the global CPI (Consumer Price Index) inflation low. The net effects resulted in global growth falling short of expectations in 2015, with global GDP growth slowing to 2.4 per cent, down from 2.6 per cent in 2014. Looking ahead, global growth is projected to make a moderate recovery but at a slower pace than initially envisioned. There are also concerns about increasing growth disparities as well as elevated economic uncertainties and financial market volatilities. In the next few years, the global real GDP growth rate will likely accelerate and return to its long-term average of around 3.5 per cent, supported by various positive factors. These are likely to include stronger consumer demand and greater business spending in many developed countries, particularly in the US and UK. Some easing of fiscal constraints in developed economies, including the Eurozone, will lead to moderate improvements in their economic growth. Positive wealth generation effects are also likely to be felt from higher housing and stock market prices. The continued growth of the developed economies should help to generate additional demands for exports from emerging economies with competitive manufacturing sectors. This should help to stimulate the GDP growths of key emerging economies, including those of India, China, South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Indonesia, Mexico etc.
Economic stabilization and some modest recovery of the other weaker emerging markets, such as Brazil, Argentina, Thailand and South Africa, are also expected to take place with the global economic recoveries. There is also a good deal of accumulated pent-up demand in the global economy together with a huge amount of excess production capacity that could come back online when needed. However, the low inflation, with the low oil prices, will not be a permanent feature of the global economy. As soon as oil and commodity prices stabilize and rise again, the global CPI inflation is likely to return to its previous higher levels. There is considerable uncertainty associated with the growth projections for the coming years. The risks to global growth stem from the same headwinds that have constrained the world economy since the 2007ā08 financial crisis. These potential risky headwinds include high levels of household and public debt, lack of significant progress in globalization plus rising populism and anti-business public sentiment in the aftermath of the financial crisis.
There are also many significant risks and constraints that can reduce the projected global economic growths. These major risks include potential collapse of the Eurozoneās fragile recovery, a disorderly or sharper than expected slowdown of the Chinese economy plus new currency wars or protectionism. In addition there are serious geopolitical risks, such as the RussiaāUkraine conflict or conflicts in the Middle East. Premature monetary tightening by the US Federal Reserve could lead to a slowdown of the US economy, which could then affect the global economy. Sudden capital outflows from emerging economies with weak economic fundamentals could be dangerous. The low oil prices could lead to a collapse in spending and investment in the oil sector. This could then result in future oil supply non-availabilities in the medium and long terms, which could lead to future oil price shocks. Prolonged weakness in the major economies could lead to larger than expected reductions in global economic growth. The lack of structural reforms in developing countries could negatively affect their productivity and capital allocation, resulting in capital outflows and slow growth.
Given these risks, the maintenance of economic growth will remain a key policy priority for all the developed countries and emerging economies. In developed economies, this will require continued support from monetary and fiscal policies to support both the near-term recovery and long-term growth. In a number of developed economies, an increase in public infrastructure investment could also provide support to demands in the short term and help boost potential outputs in the medium term. In emerging economies, the scope for macroeconomic policies to support growth will vary across countries and regions. In general, building fiscal surpluses or reducing fiscal deficits as well as keeping inflation under control will strengthen their economic fundamentals. In both the developed and emerging economies, there are urgent needs for structural reforms to strengthen sustainable economic growth.
Developed economiesā growth strategies and risks outlooks
The key developed countriesā economies are generally recovering well from the financial crisis, particularly the US and UK. There is also a gradual, modest recovery underway in the Eurozone. Hence it is generally expected that the real GDP growth of the developed economies globally should improve from 1.8 per cent in 2014 to 2ā2.3 per cent in the short term. However, the damage inflicted by the 2007ā08 financial crisis to the real estate, construction, banking and household sectors of developed economies was particularly severe. Most developed economies, perhaps with the exception of the US and UK, will not be able to get back to their full economic health for some more years. Therefore the real GDP growth of developed economies will likely remain at 2ā2.5 per cent in the medium term.
As in the past, the real GDP growth rates of the developed economies globally will continue to remain lower than emerging economies. This is caused not only by the structural problems facing developed economies but also by the new economic reality that emerging countries are likely to grow faster than developed economies.
The economies of developed countries will continue to require support from expansionary monetary policies and flexible fiscal policies to support their economic growth in the short term. However, there will be compelling needs for fiscal consolidation in the medium to longer term to put their sovereign finances on sustainable footings. These policies should be supported by long-term structural reforms to boost productivity and by strengthening of the banking systems, especially in the Eurozone. This will then help to foster more sustainable future growths and make their debt levels more manageable. Otherwise, sooner or later these countries will find themselves facing another debilitating financial and economic crisis that could potentially be worse than that of 2007ā08. Economic outlooks for the key major developed economies are discussed in detail as follows.
United States
The US is currently the best-performing of the developed economies globally and its economic recovery is expected to remain on track supported by accelerations in domestic consumer spending and house building. US consumers are likely to step up spending in response to the lower energy prices and robust gains in employment, real incomes and net worths. The recoveries in US house building will gain momentum as the labour markets improve and credit standards ease. The falling capital spending in the oil and gas energy sector and a strong-dollar-induced drag from net exports are expected to restrain the real US GDP growths somewhat. However, the impact should not be large enough to damage the US economic recovery in any significant way. The US real GDP growth rate in 2015 was 2.4 per cent; the same as 2014. In the first quarter of 2016, the US economy expanded an annualized 0.5 per cent, which was below the market expectations of 0.7 per cent. Looking ahead, US real growth rates are likely to rise to 2.5ā2.7 per cent in the short term and then settle at around 2.8ā3 per cent in the medium term.
The potential major risks to projected US economic growth include sudden significant rises in the market interest rates during monetary accommodation or a slowdown in US household formation and housing starts. Another recession in the Eurozone or serious global conflicts may affect the US economy. A significant slowdown in some vulnerable emerging economies, particularly if the unwinding of the US monetary stimulus causes sustained capital outflows from these economies, could also derail US economic growth. A sluggish global economy could also pull US economic growth down with it. High sovereign debts plus potential gridlocks over US national debts and spending issues after the upcoming national US presidential elections are also serious future potential risks for the US economy.
Western Europe
The Eurozone economies are slowly regaining their momentum. Consumer spending is accelerating but fixed investments still remain weak. Monetary stimulus through quantitative easing, euro depreciation, expanding export markets and low oil prices will provide some support to EU economic growth. However, tight credit conditions, high unemployment, limited wage growth plus high private and public debt levels will limit the economic progress in some Eurozone countries, particularly the peripheral countries. The recent and ongoing immigrant inflow crisis affecting many European countries is also expected to add more uncertainties and risk to future EU economic growth. Greece continues to face economic problems after its difficult negotiations with the EU and international creditors. There are still significant risks to the economy of Greece if the economic recovery plans are not managed well or fail. This could then lead to another crisis and even the exit of Greece from the Eurozone in the years ahead.
Eurozone growth is forecasted to improve from 0.9 per cent in 2014 to 1.3ā1.5 per cent in the short term. Looking ahead, it could improve further to 1.6ā1.8 per cent in 2016 and then settle at around 1.5ā1.6 per cent for 2017ā20. In contrast, the economies of UK, Ireland, Sweden and Germany are likely to sustain higher economic growth rates. The key risks to the projected Eurozone economic growth include high private and public debt levels, impaired balance sheets of the household sector, banking sector problems, tight credit, low investments, fiscal austerity and slower progress on structural reforms, particularly in the peripheral Eurozone countries.
Japan
Japan is a major oil and gas energy net importer. So the recent global low oil and gas prices are generally expected to be beneficial for the Japanese economy with lower energy import costs. In addition, Japanās highly accommodative monetary policy, supportive fiscal policy, lower oil prices and weaker yen will support its export growths. However, it is generally expected that Japanās long-term growth prospects will not improve without implementing essential structural economic and social reforms to combat the key impacts of its declining population, low economic growth and high sovereign debts. Japanās economic growth rates are expected to increase from 0.2 per cent in 2014 to 0.8ā1.0 per cent in the short term. Looking ahead, Japanās economic growth rates are likely to rise to 1.2ā1.4 per cent in 2016, and then decelerate to 0.5ā0.6 per cent in 2017 as the second sales tax hike is implemented in April 2017. By 2020, Japanās economic growth rates are expected to have risen to 0.8ā1.0 per cent. These growth rates though positive are still much lower when compared to other strong developed economies, particularly the US and UK. Japanās high sovereign debts, which are projected to remain above 240 per cent of GDP during 2014ā20, together with a declining and ageing population are the two most serious challenges to Japanās economic recovery. Japan will need to increase its labour participation rates and inevitably reform its immigration policy to deal with the adverse impacts of demographics on the economy. Japanās future economic growth rates could decline even more if these structural reforms are not enacted.
