Sunday, April 22, 2018
Sunday, April 15, 2018
Global Macroeconomic Snapshot April 2018
World Order under Assault
The post-world war II world order is under attack. Not by foreign enemies but from within. At the forefront of the destruction of this order are those countries which were most instrumental in establishing this order, with the United States and the United Kingdom in the first ranks.
With its vote for leaving the European Union, the United Kingdom has abandoned its support for one of the main institutions that came into existence after World War I besides NATO, the IMF and the GATT (now renamed to WTO in 1995).
A national economy exists within the framework of the nation’s politics, and a nation operates within the framework of its international relation and its strategic global position. When the international framework is changing, the national macroeconomic situation remains not untouched.
As of now, the first major negative impact of the shifts in the global framework is a heightened insecurity. The rising uncertainty impacts negatively on the propensity to invest. Even with the currently extremely low interest rate, investment has remained weak. As a consequence, the way out of the crisis of 2008 has been slow and weak.
The risk has emerged that the global economy will be tanking before a full recovery from the last recession has taken place.
Institutional change
The mutation of institutions is a common feature of human history. The problem is that sometimes, the old institutional framework crumbles before a new system has come into place. Along with that emerges the other problem that while the established leading power is waning, the new one has not yet attained its capacity of leadership.
This seems to be currently the case when the President of the United States is openly announcing the retreat of his country from major global institutions, while very few countries outside of China are inclined to accept a Chinese global leadership.
There was a time when the hopes were high that the European Union (EU) could work in tandem with the United States to provide an almost perfect mixture between hard and soft power and together with a primordial economic and financial global dominance. With the retreat of the United Kingdom from the EU, this option is off the table.
The United Nations Organization (UNO) with the International Monetary Fund (IMF) and the World Bank along with the World Trade Organization (WTO) could not live up the expectations at the time of their foundations. Now, even current financing of their maintenance confronts obstacles and when the United States challenges the authority of the WTO other countries will follow suit.
GLOBAL ECONOMIC OVERVIEW
Economic growth
Except for the United Kingdom, where the rate of economic growth fell from 2.3 per cent to 1.7 per cent, economic growth accelerated in the major economies from the fourth quarter of 2016 to the fourth quarter of 2017. In the United States, the economic growth rate went up from 1.9 per cent to 2.3 per cent. In the European Union, the economic growth rate rose from 2.1 per cent to 2.5 per cent, while in Japan, the rate increased from 1.1 per cent to 1.6 per cent.
Price inflation
With the exception of Japan and the United Kingdom, the annual overall inflation rate tended to decline from January 2017 to January 2018. In the United State, the price inflation rate fell from 2.4 per cent to 1.8 per cent. The Euro Area experienced a sharp decline from an annual rate of 1.6 per cent to 0.9 per cent. In Japan, the rate rose noticeably from 0.4 per cent to 1.5 per cent. In the United Kingdom, the price inflation rate rose over the year from 1.6 in January 2016 to 2.3 per cent in January 2018.
Long-term interest rates
Interest rates in the industrial countries have remained low. In February 2018, the interest rate in the United States stood at 1.75 per cent, in the Euro Area, the rate was 0.92, and in Japan, the long-term annual interest rate was 1.5 per cent. In the United Kingdom, the long-term interest rate rose from 1.3 per cent in February 2017 to 1.6 per cent in February 2018.
Exchange rates
From February 2017 to February 2018, the exchange rate of the euro (dollars per euro) rose from 1.06 to 1.23 to the U.S.-dollar. In Japan, the yen strengthened from a rate of 113.1 to 108 yen per U.S.-dollar. The British pound rose from 1.35 dollars per pound to 1.40 dollars per pound.
Current Account
The United States continues having current account deficits, which only slightly fell from 2.4 per cent gross domestic product to a rate of 2.1 per cent. The Euro Area, along with Japan have persistently high surpluses with 4.3 per cent in the third quarter of 2017 of the Euro Area and of 4.5 per cent in the case of Japan.
Emerging Markets
PIIGS is a pejorative acronym that stands for a group of countries formed by Portugal, Ireland, Greece and Spain that was coined during the European debt crises to distinct the weaker European economies, particularly at the Southern flank of the European Union, from the stronger economies in the North. While these countries received extensive media coverage during the debt crisis in the years after 2010, it has almost gone unnoticed how a recovery of these counties has taken place.
Portugal
As of January 2018, the annual economic growth rate of Portugal was 2.4 per cent down from its peak of 3 per cent in July 2017. Since January 2015 the unemployment rate has come down from 13.7 per cent to 8.1 per cent in January 2018. Nevertheless, at a level of over 120 per cent since 2012, the government debt situation remains precarious.
Ireland
The Republic of Ireland has made the most impressive recovery from its debt crisis. After negative rates between five and ten per cent around 2010, Ireland has experienced a sharp recovery that lifted its annual economic growth rate up to around five per cent from 2011 to 2016. Since peak growth in January 2017 with an annual rate of eleven per cent, the rate of economic growth has come down to 1.5 per cent in January 2018. Since 2010, the country’s unemployment rate has fallen from over eight per cent to a current rate of 2.4 % while government debt fell from a rate of close to one hundred per cent during the debt crisis to a rate of 42.3 per cent to gross domestic product in 2017.
Greece
Different from Portugal and Ireland, the recovery of Greece has been weak and slow. After a negative rate of four per cent in 2012, Greece has recovered from negative economic growth but not yet achieved more than a zero-growth rate over the years from 2013 to 2018. Consequently, unemployment has remained high and fallen only from over 25 per cent in the period 2013 to 2016 to a current rate of slightly over twenty per cent. The debt situation of Greece is still very precarious with of public debt to gross domestic product of close to 180 per cent since 2011.
Spain
Spain has recovered fairly well from the debt crisis. From a negative growth rate of gross domestic product of four per cent in 2013, Spain’s economic growth rate has steadily risen to a rate of close to four per cent since 2013. As of December 2017, Spain’s annual growth rate stood at 3.1 per cent. Unemployment, however, is still high at over 16 per cent in January 2018, albeit it has come down considerably from a peak of 25 per cent in the years of the debt crisis. Despite the economic recovery, the debt coefficient of Spain has continued to rise from 39.5 per cent in 2008 to 99.4 per cent in 2016.
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