Specter of protectionism haunts global economy

By Cheng Shi Source:Global Times Published: 2017/4/23 21:53:39

Illustration: Luo Xuan/GT


The global economy is in the midst of a period that is both encouraging and bewildering, in the aftermath of the financial crisis.

Earlier this month, the IMF released its World Economic Outlook report, titled "Gaining Momentum?" Thanks to a surprisingly strong recovery in the past six months, the IMF raised its global economic growth projection for 2017 to 3.5 percent. The IMF has generally been too optimistic recently, with its projections mostly being cut in the course of some 40 revisions in the past decade. However, the fund broke this pattern in its recent report, with a 0.1 percentage point upward revision to 3.5 percent, an even more bullish estimate than before.

Looking purely at short-term growth, 3.5 percent growth falls within the trend level of 1980-2016 but it may lack sustainability. Whether it's the commodity market or easing policy, they are undergoing marginal tightening. This will weaken global short cycle recovery momentum. In the past six months, the economies that beat expectations the most were the UK, Japan, Spain, China and Russia. Their new projections for 2017 are 0.9, 0.6, 0.4, 0.4 and 0.3 percentage points higher than half a year ago, respectively. But Russia and Japan still face the risk of stagnation.

The IMF believes the global economy now faces a complicated situation of short cycle rebound plus long cycle downturn. Such a view of the global economy conforms to our "cyclical complication" paradigm. Cyclical volatility is mainly the result of earlier expansionary policy efforts taking effect intensively. With diminishing policy effects, the global economy still faces huge downside pressure, and after volatility, the global economy will inevitably have to enter a period of correction.

The weak global recovery is fundamentally based on the slowdown of total factor productivity. Since the financial crisis, financial innovation has been suppressed to some extent, hindering optimized allocation of resources. Besides, demand-side stimulus policies have been rolled out frequently across the globe, but supply-side structural policy has been relatively rare. Against that backdrop, policy stimulus impedes the natural recovery of productivity.

Downside risks compound to form a negative feedback, increasing the likelihood of systemic risk realization. The prevalence of protectionism, isolationism and populism and conversion from economic risk to geopolitical risk, weigh on productivity at various levels.

Economic fundamentals set the stage for trade conflict. The key reason for increasing global trade friction is the heterogeneous cyclical positions that invite antagonism. Added to this rivalry is US President Donald Trump's extremely provocative policy statements and actions. The IMF in its World Economic Outlook report emphasized the dangers from protectionism. Both theoretically and practically, submission to protectionism will hinder long-term recovery. Therefore, the IMF suggests possible policy levers including active labor market reform, more progressive taxation, changes to housing and credit markets and implementation of structural policy. These measures could potentially address inequality and the protectionism pressure.

However, we believe that although the IMF's suggestions are reasonable, it is unlikely that protectionism can be suppressed in the short term, given the complicated external environment. This intrinsic contradiction will further weigh on the long-term outlook for the global economic recovery, and the IMF appears to be aware of this. In its report, the IMF maintained the trade growth projection at a low level of 3.8 percent for 2017 and cut the projection for 2018 by 0.2 percentage points to 3.9 percent. Global trade growth remains much weaker than the trend level and forces moving against globalization are reaching their climax.

Given the hardly sustainable market frenzy led by cyclical volatility, protectionism and its geopolitical risk will suppress the full return of investors' risk appetite.

Increasing trade friction is inevitable in 2017. The global economy is in the midst of macro chaotic changes and uncertainties will continue to spring up here and there. China and the US remain the double anchors of the global recovery. Their stable yet below trend level growth prospects set the weak keynote of recovery.

The author is head of ICBC International Research Ltd. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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