An analysis of perspectives and changes in the evolution of the global economyIn this semester’s forecast, the International Monetary Fund has just reviewed their global economy growth estimates towards the low. After expanding in 2011 at a pace of 4% and 3.1% in 2012, the organism projects a 3.1% rate in 2013, two tenths less than their previous estimate. The World Bank’s projection is even lower, with a 2.2% this year reaching 3% only in 2014. Both very far from the average 4.8% recorded during the years previous to the crisis, which quantifies the entire path the global economy must travel in order to return to the levels of expansion prior to the global financial and economic crisis.
A new factor added to developed countries’ poor performance is the stem affecting the emerging economies, mostly China, India, Brazil, Russia and South Africa: The IMF projects an average 5% growth for this year, three tenths less than their latest projection. As far as the World Bank is concerned, these estimates are optimistic: they estimate a 4.5% growth in 2013.
Within the growth contraction of emerging economies, which explained the 50% expansion of the World Gross Product in 2012, the most compromised are China and Latin America.
In China’s case, the government projects a 7.5% growth for this year, far from the almost 10% rates that characterized the recent past. The reasons for the Chinese economy’s deceleration are different than the ones regarding the rest of the emerging economies. The performance of the Chinese industrial sector shows symptoms of a persisting anemia and in June exports declined for the first time. In this context, the new Chinese leadership is trying to achieve one of the most difficult economic maneuvers: gently landing an economy that flew at 10% rates without greater difficulties in their roadmap. With the decay in developed countries’ demand, Chinese exports were severely affected. In last June exports and imports declined, for the first time since the process of Chinese economy reactivation begun. At the same time in this first semester investments and the manufacturing sector growth rate were reduced. As in any economy, if exports and investments decline there is only one motor to resort to in order to maintain growth: the domestic market. And it is precisely towards that ‘motor’ where President Xi Jinping’s new strategy aims.
Obviously this new dynamic implies making the transition from an export driven economy to an economy driven by the domestic market assuming a somewhat smaller growth rate. Growing at 7.5% is not an unexpected consequence, it is a previously established rate in the context of a process of careful planning, given the new international context and some structural problems the Chinese economy has been presenting, such as the risky liquidity injection to maintain the investment rate, mostly through public work and abundant housing credit. Controlling that liquidity expansion makes managing a policy of export and investment decline compensation by reactivating the domestic market more complex, since it limits credit and increases the interest rate that climbed to two digits this past June.
What seems outstanding about the Chinese planning process is that despite the most optimistic estimates (IMF: 7.8%) or most pessimistic (WB: 7.3%), the second semester closed with a product expansion of exactly 7.5%, just as the Government had announced, which has consciously opted for a smaller and more sustainable growth rate. ¨We must not judge a country merely on their gross domestic product growth¨, said Xi in a meeting last week. This, while it is valid for China, it is preoccupying for the rest of the world. First because for the next years, if the external demand does not bounce back and the internal imbalances continue, Xi’s Government can plan for even smaller growth rates and, second and most importantly, because the performance of many emerging economies and Latin American and African countries are bound to the Chinese demand, especially for commodities.
It is very likely that within commodities food will suffer less from the Chinese deceleration, since as it has been mentioned, the landing strategy implies reactivating the domestic market. If investments and the manufacturer activity decline, the demand for minerals will be affected.
As for Brazil and the rest of Latin American countries, they will be affected in their growth rate, in a larger or smaller scale, according to the dependency degree of their economies on the foreign sector, becoming more serious in those economies whose exports are commodities without higher aggregate value. In Brazil’s case, the situation would become more complex if the political turbulence deepened in an electoral year. The growth estimates for Brazil revolve around 2% for 2013.
With Europe in a deep stagnation and fighting to achieve barely positive rates in 2013 and 2014, with United States consolidating a mild reactivation still underpinned by a zero interest rate and Ben Bernanke’s recent announcement of the liquidity injection continuing through the purchase of bonds on behalf of the FED, it is possible to deduce that developed countries will continue to have very little influence on the global growth rate and, therefore, very limited leverage on the global market’s reactivation.
It is then expectable for 2013, and possibly large part of 2014, to have a global economy with small growth and an anemic global market. While this situation was already familiar to developed countries, it is new for the emerging economies that backed the average global rate with their high growth rates.
For several years the world will grow at lower rates, which implies that absorbing the millions of unemployed people the crisis has generated will require a firm social policy and not just an economic one, which the world will have to face beyond the effective jobs the recovery will produce. This way there is a strong imbalance between, on one hand, poverty and unemployment and, on the other, the weakness of the global economy recovery. It also occurs that smaller growth rates affect the environmental urgencies our planet suffers a little less, a little that however could be approached differently and not with the enormous social cost caused by the contemporary crisis.