Global output likely to decelerate moderately this year – UNCTAD

The world economy is expected to record a slower expansion this year, according to projections by a UN economic body, as persistent weak demand conditions in the developed countries, among other factors, continue to stifle global growth.

by Kanaga Raja

GENEVA: Global output is likely to decelerate moderately in 2016 to register a growth rate of around 2.3%, compared with 2.5% in 2015. This will be the sixth year in a row that the global economy repeats a modest expansion, well below that of pre-crisis levels, the UN Conference on Trade and Development (UNCTAD) has said.

In its chapter assessing current trends and challenges in the world economy, UNCTAD’s Trade and Development Report 2016 (TDR 2016), released on 21 September, said that this year’s performance reflects an expected slowdown in developed countries’ growth, from 2.0% to 1.6%; economic stagnation in transition economies, an improvement over their contraction in 2015; and the continuing growth in developing countries of about 4%, resulting from sustained growth in most Asian countries, a deceleration in Africa and recession in Latin America and the Caribbean.

The world economy in 2016, said UNCTAD, is in a fragile state, with growth likely to dip below that registered in both 2014 and 2015. The mediocre performance of developed countries since the 2008-09 economic and financial crisis is set to continue, with the added threat that the loss of momentum in developing countries over the past few years will be greater than previously anticipated.

“Without a change of course in the former, the external environment facing the latter looks set to worsen with potentially damaging consequences for their prosperity and stability in the short to medium run. More widespread contagion from unforeseen shocks cannot be ruled out, knocking global growth back even more sharply. The decision by the United Kingdom electorate to leave the European Union (EU) is such a shock,” said TDR 2016.

Growth in the United States this year is likely to slow down, as the momentum that was built through the quick detoxification of its banking system and a more aggressive use of monetary policy loses traction. UNCTAD said that while unemployment has dropped steadily to the level registered before the crisis hit and real earnings have begun to pick up, given its weak underlying employment rate, the number of distressed households with high levels of debt and exporters struggling with a strong dollar, there are no guarantees that the economy will enjoy a robust period of growth anytime soon.

Recovery in the euro zone has lagged behind that of the United States, in part because of the more timid use of monetary policy but also very tight fiscal stances in some countries. The tentative pick-up of growth from 2015 seems likely to stall this year, and could even be reversed due to the uncertainty triggered by the announced departure of the United Kingdom from the EU (“Brexit”).

“Economic growth continues to be held back by weak domestic demand and only sporadic signs of an improvement in real wages. Efforts to tackle the sharply diverging economic performances of the countries in the euro zone are complicated by political uncertainties, such as the ongoing migration crisis, and doubts about the future pace and direction of European integration.”

UNCTAD said that the European economies outside the euro zone have performed better in recent years, mainly because the monetary authorities in many of those countries have been willing and able to orchestrate financial bubbles.

“The economy of the United Kingdom, even without the threat of Brexit, is set for a difficult period ahead given its levels of indebtedness and a persistently high trade deficit. The longer term consequences of the leave vote are still unclear, given the unprecedented nature of the decision and the political uncertainty it has created, though growth will undoubtedly slow in the short term. Just how steep the drop could be, given the highly financialized and flexible markets in the United Kingdom, is difficult to predict.”

The continuation of weak demand conditions in the developed economies is stifling growth in the global economy. In this context, neither financial bubbles nor export surpluses offer a sustainable solution to tepid growth and weak labour market conditions.

According to UNCTAD, a more balanced policy response is called for in the developed economies, combining an expansionary fiscal stance resulting from both spending and taxation decisions, supportive monetary and credit policies along with strengthened financial regulations, and redistributive measures through minimum wage legislation, direct taxation and welfare-enhancing social programmes. “The appropriate policy mix will vary across countries, though large public infrastructure spending would seem to be a common thread,” it said.

Developing economies will likely register much the same average growth rate as in 2015, 3.8%, but with considerable variation across countries and regions, and with downside risks increasing.

“The reluctance of developed economies to deal effectively with their own high levels of indebtedness (or rather the tendency to do so through bailouts for creditors and austerity for debtors) and their insistence in relying almost entirely on monetary policy to orchestrate recovery highlight the potential dangers facing policymakers in developing countries.”

Alarm bells have begun to ring over exploding corporate debt across emerging economies, and it appears that much of the surge of financial inflows into emerging and developing economies has found its way into real estate and financial asset bubbles rather than long-term productive investment projects.

While there is agreement that these weaknesses are closely interconnected, there is no sign of a concerted move towards policy coordination across systemically important economies. The United States has begun to recognize that its economic policy decisions can carry a sizeable impact beyond its own borders, with the Federal Reserve responding with an even more cautious stance on interest rate rises.

“But a more ambitious policy package is needed to address existing imbalances and to ease the constraints on faster growth, whether in large or small countries, surplus or deficit economies, commodity or manufacturing exporters, creditors or debtors. A global new deal will need to move beyond business as usual.”

According to UNCTAD, there are signs that international bodies such as the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) are rethinking their approach to macroeconomic adjustment (although this has not yet been sufficiently translated into their policy recommendations or conditionality).

“The necessary next step is for them to move away from a narrow discussion of structural reform that promotes a familiar package of liberalization and deregulation measures, and instead consider the wide range of actions needed to diversify the structure and level of sophistication of economic activity.”

Such actions should aim to increase productivity, create more and better jobs, boost household incomes, increase fiscal revenues and investment, and foster technological progress; and all these need to be implemented in the context of a world that is rapidly moving towards a low-carbon future.

Developed-country trends

TDR 2016 said among the developed countries, the United States is expected to continue growing in 2016, albeit with a significant deceleration to less than 2%, and probably closer to 1.5%. Growth is almost exclusively led by private consumption, as unemployment drops to a level close to that registered before the crisis hit and as workers’ real earnings have begun to pick up.

After several years lagging well behind the United States, owing to the more timid use of monetary policy and an even greater proclivity for austerity measures in some countries, growth in the euro zone accelerated from 0.9% in 2014 to 1.7% in 2015, although no further acceleration is expected in 2016.

This improvement did not result from an expansion of net exports, despite the depreciation of the euro in 2014-15, but rather from higher domestic consumption and investment levels, with some increase in real wages as a result of rises in the minimum wage and falling energy prices.

Faster growth was also backed by an expansionary monetary policy and a less stringent fiscal stance. These improvements, however, remained below expectations, as monetary expansion by the European Central Bank (ECB) has not translated into a proportionate increase of credit to the real (economy) sectors.

European economies outside the euro zone have performed better in recent years, partly because they faced lower fiscal constraints, but mostly because they had more expansionary monetary stances, which led to asset appreciation. Such policies were applied in particular in the United Kingdom, where high trade deficits and high debt levels could be financed with capital inflows.

The recent vote to exit the European Union could compromise these policy stances by reducing the attractiveness of the United Kingdom economy to foreign investors, leading to asset and currency depreciations, lower domestic consumption and investment, and a deterioration of balance sheets in all sectors, including lending institutions with higher levels of non-performing loans (NPLs).

Developing-country trends

According to TDR 2016, Latin America is heading towards a second consecutive year of economic stagnation and a risk of negative growth in 2016. This is due mainly to weak economic performance in South America, where several countries have experienced falling levels of consumption and fixed capital formation.

Tighter external conditions (including losses from the terms of trade) in 2015 led to fiscal retrenchment and exchange rate depreciation. To check the resulting threat of inflation, some countries, such as Brazil and Colombia, responded by raising interest rates, causing further growth deceleration.

Slower growth is forecast for Africa in 2016, due to weaker performance in North Africa and southern Africa. In the former, political instability and insecurity will continue to hinder economic recovery. In southern Africa, activity is expected to decelerate further because of depressed commodity prices, severe droughts and electricity shortages as well as lower dynamism in South Africa, which is an important export destination for neighbouring countries.

East Africa is projected to continue its growth momentum in 2016, boosted by strong domestic investment including large public investment programmes, and lower oil prices, while most West African countries (Benin, Cote d’Ivoire, Mali, Senegal and Togo) are expected to record high growth rates generally, supported by increases in public investment, improving agricultural productivity and a dynamic private sector.

Developing Asia remains the fastest-growing region, with an expected growth rate similar to that of 2015, around 5%. China grew 6.7% year-on-year in the first half of 2016, a marginal slowdown in relation to 2015 (6.9%) that nevertheless corroborates the shift towards more moderated growth. “This is the result of several factors, including weakness in external demand, efforts to reduce overcapacity in some sectors and a strategic reorientation towards consumption-led growth, with a larger place for services,” said UNCTAD.

India’s growth rate is projected to remain strong, at 7.5% in 2016, further cementing the rather large terms-of-trade gains of 2015 (over 2% of GDP). Growth is primarily driven by rapidly expanding domestic consumption, supported by the low prices of commodities (particularly fuel), a rise in real incomes (including public sector wages) and lower inflation.

Export demand declined in 2015, and gross fixed capital formation weakened in late 2015 and early 2016; however, investment (private and public) is expected to expand, which would support a solid growth performance through to 2017.

Despite these trends, high public debt and current rates of inflation may limit the room for supportive fiscal policies. The stalled manufacturing share in GDP, as also reflected in the limited capacity of the sector to create jobs with higher wages, will need to be addressed to ensure India’s growth in the longer term.

TDR 2016 said South-East Asia is likely to maintain a growth rate above 4% in 2016, largely based on domestic consumption and investment demand.

West Asia is expected to grow at around 2% in 2016, down from 2.9% in 2015. Downward adjustment will hit the major oil exporters of the region including Kuwait, Qatar, Saudi Arabia and the United Arab Emirates, whose export revenues fell on average by 6.1% in 2014 and by 34.1% in 2015.

“Claims of increased tariff

protectionism appear exaggerated”

According to TDR 2016, the growth of global merchandise trade volume slowed to around 1.5% in 2015, from 2.3% in 2014, and the slow pace has continued through the first half of 2016. This trend, which began in 2012, has been more pronounced than for world output.

To many observers, this prolonged period of sluggish trade – the longest since the early 1980s – is a principal reason for the weakness in global growth since the financial crisis, just as its revival is seen as the best hope for recovery, overcoming other aggregate demand constraints.

Accordingly, measures to increase external competitiveness and facilitate trade have become a policy priority, especially in developed economies. Despite their adoption, the fact that trade has continued to slow down suggests limits to such measures and raises the possibility that they may even be self-defeating.

First, domestic demand, on which trade depends, is not an exogenous outcome for policymakers; many of the measures adopted to boost export market shares tend to weaken aggregate demand. Second, by limiting the role of the public sector and accelerating the pace of financial liberalization, the policy space to manage a sustained recovery is significantly narrowed.

Third, what may appear sensible from the perspective of a single country or group of countries, like aiming at net export gains, runs into a “fallacy of composition” at the global level (not all countries can be net exporters) and can exacerbate a “race to the bottom” that worsens the sustainability of global demand.

Yet, said UNCTAD, despite the fact that the measures to increase competitiveness have contributed to, or at least preceded, the global trade slowdown, policymakers in many countries continue to see them as the only route to the recovery of trade and, by implication, economic growth.

“Indeed, governments in both developed and developing countries have been pursuing mega regional trade and investment agreements, as a more comprehensive and workable approach to boosting trade and advancing economic integration than through discussions at the multilateral level. The prominent place that such agreements have taken in official policy discussions, and even electoral campaigns, calls for full and careful scrutiny.”

It has been argued that trade has slowed because of rising protectionism since the global crisis. However, apart from isolated cases concerning a few products (such as some metal products), there is little evidence that tariff changes explain the prolonged sluggishness of global trade.

Average tariff figures have been declining steadily since the establishment of the World Trade Organization (WTO), and are currently at historic lows. Moreover, any partial tariff increases were certainly not on a scale that could explain the sharp slowdown in trade.

“Global averages could, of course, be misleading given the uneven geographical distribution of trade.”

UNCTAD cited a detailed analysis of import tariffs by region over the period 2008-12, the period of trade slowdown, showing trade restrictiveness measures from the perspective of importers as well as exporters, and confirming that while the group of developed countries has broadly maintained the same level of tariff restrictions over these years, most developing regions have reduced such restrictions (with the partial exception of South Asia, showing a negligible increase of less than half a percentage point).

In terms of market access defined by the levels of import tariffs faced by exports from different regions, a similar conclusion can be reached: developed countries faced lower tariff restrictions in 2014 than in 2011 or 2008, as did countries in South Asia, West Asia and Africa. Meanwhile, East Asia, Latin America and economies in transition faced similar or higher tariffs for their exports to developed countries than in 2008.

In sum, while the aggregate picture confirms small changes in tariffs since the financial crisis, developing countries overall have made more concessions than developed countries in recent years.

On a bilateral basis, the same indices of restrictiveness suggest that even though many developing countries still have higher levels of applied tariffs than developed countries, these have declined since 2008 in most regions, especially within regions.

“This empirical evidence suggests that neither the current level of average tariffs nor their trend in recent years can be seen as an explanation for the slow growth of global trade or an obstacle to future recovery.”

Moreover, given that the level of “applied tariffs” by countries, aggregated at the global level, has remained considerably and consistently below the corresponding level of most favoured nation tariffs, “the claims of increased tariff protectionism would appear to be at least exaggerated”, said UNCTAD.

Concerns have also been raised about a possible surge of hidden or “murky” protectionism since the global financial crisis, to the extent that the trade slowdown has been attributed to rising “non-tariff measures” (NTMs) applied, in particular, to specific product lines.

“This is a more nuanced (and more difficult to measure) aspect of trade policy, since NTMs cover a wide array of regulatory issues, standards, technical requirements, environmental and health conditions, etc.”

UNCTAD said it has made progress in generating indices of NTMs but the indicators are still quite fragmentary. A proper assessment of these measures requires in most instances a case-by-case analysis and may even involve following up litigation processes in some depth.

Aside from the difficulty of measuring NTMs, what is even more difficult is to quantify their impact on global trade volumes. Needless to say, a number of NTMs, particularly in relation to standards (quality of products, production processes) and also in relation to compliance with patents and other regulations, have historically contributed to constrain market access of developing countries to developed countries. Yet, said UNCTAD, this is not an emergent problem explaining the slowdown in recent years.

Other trade determinants

Beyond issues of trade policy, another possible factor explaining the observed trade deceleration is the changing structure of demand, particularly in systemically important economies. A shift in the composition of demand towards services or away from investment goods might offer an explanation, but neither the timing of the trade surge nor its subsequent decline would seem consistent with such shifts in the structure of global demand.

According to TDR 2016, a more compelling explanation is based on the evolution of international production networks. The rise of global value chains, given their heavy reliance on imported parts and components for processing and re-export, and the very high elasticity of trade between the mid-1980s and the early 2000s, can be explained by the establishment of the first stages of these chains.

As developing countries participating in such chains diversify their economies and develop additional skills and technologies, it is possible that a greater proportion of the inputs used in their tradeable sectors could be produced domestically, leading to a reduction of global trade elasticity.

If a sufficiently large trade partner, or a large group, evolves rapidly from one stage to the other (a phenomenon characterized as “shrinking chains”), then there is likely to be an immediate impact on the volume of global trade.

UNCTAD said that this was apparently the case for China, which managed to reduce the import dependence indicator of its manufacturing exports from about 60% in 2002 to 40% in 2008.

TDR 2016 also found that the growth of wages in most developed economies has been weak or stagnant for a considerable time, with the result that the share of wages in national income has been on a downward trend since the 1980s.

A number of factors explain this trend: the general shift in bargaining power away from labour, partly due to the greater mobility of capital; outsourcing and de-industrialization; the lower costs of the consumer basket resulting from the ability of multinational enterprises to import back cheaper goods outsourced elsewhere; and the compensating ability of households to borrow on the back of the holding gains derived from the ownership of equity in a context of asset bubbles.

“The pressures on wage shares in developed countries have not been offset by a trend in the opposite direction in developing countries,” said UNCTAD.

In some conclusions, TDR 2016 said the fast pace of global trade between the mid-1980s and the financial crisis was, in part, encouraged by an increased pace of trade liberalization, but it was also heavily dependent on a series of global macro-imbalances that eventually led to that crisis.

Drastic correction of bank lending in deficit countries which occurred with the global crisis of 2008-09 led to a contraction and subsequent weak recovery of trade despite the rise of public sector deficits.

“The persistence of the most critical of imbalances, that relating to wage shares, however, shows why a recovery in trade is proving difficult. More precisely, as long as the global wage share continues to decline because of efforts to increase competitiveness, including by shifting production from high-cost to low-cost locations, global trade growth will rely on the accumulation of deficits by a subset of economies.”

For such patterns of trade growth to continue, however, either fiscal deficits or credit bubbles have to help revive domestic demand, and therefore imports, which otherwise would remain inadequate in the face of the continuing weak growth of household income.

According to TDR 2016, a conservative estimate is that during the coming years there will be a deterioration of the global wage share somewhat greater than 1% of the projected global GDP. At the end of the five-year projection the wage share will reach a slightly lower level than in the pre-crisis period.

The pace of bank credit expansion and the level of public sector deficits in the major current account deficit countries will remain around the current figures, with perhaps a slow acceleration of bank credit. The combination of these global conditions and patterns of the main current account deficit countries will not help trigger a revival of global trade, which may stay hovering around 2% per annum.

In sum, said UNCTAD, under current structural conditions and policy stances, assuming that no significant changes in the direction of policies are implemented, trade growth will continue to be sluggish as the global wage share will continue to decline. (SUNS8318)                                          

Third World Economics, Issue No. 625, 16-30 September 2016, pp2-5