Li Yang, Chinese Academy of Social Sciences: The main problem of the global economy is still recession, and the United States may have moderate stagflation in the future
Li Yang is a member of the Faculty of the Chinese Academy of Social Sciences and chairman of the National Finance and Development Laboratory
Xiao Gang, former Chairman of the China Securities Regulatory Commission, Li Yang, member of the Faculty of the Chinese Academy of Social Sciences and Chairman of the National Finance and Development Laboratory, and He Jie, Director of the Shenzhen Local Financial Regulatory Bureau, attended and shared the theme. This article is compiled from Chairman Li Yang's theme sharing.
Li yang
Abstract: This paper analyzes the trend of the global economy from five aspects: economic growth, inflation, interest rates, debt, and the future of the world and the restructuring of the industrial chain. It was pointed out that the main problem of the global economy is still the recession, and that persistent inflation, the increase in the scale of debt, the rise in interest rates, and the deterioration of the fiscal situation are the main factors causing the weakening of the economy. India, Russia, Brazil and China are the best countries for inflation in emerging economies, and the Chinese economy has good resilience and potential.
Keywords: China's economy, global industrial chain, inflation, debt scale
From the perspective of global economic growth, there are five issues that need to be paid attention to: First, the overall economic downturn, especially the developed economies in Europe and the United States, has experienced a significant downturn. Second, the high inflation in the United States and the "violent interest rate hike" adopted in response to high inflation have caused many associated financial risks. Third, the spillover impact of the Fed's interest rate hike has intensified. Fourth, the Ukraine crisis has brought the whole world into an atmosphere close to the Cold War, and the geopolitical situation has deteriorated. Fifth, the five-year-long economic friction between China and the United States has broken through the initial "zero-sum game" and turned into a "negative-sum game".
At present, the development of the world economy is showing a divergent trend, and it is necessary to deal with the complex internal and external situations carefully. China's economy still faces challenges on five fronts. This article will analyze the trend of the global economy from five aspects: economic growth, inflation, interest rates, debt, and the future of the world and the restructuring of the industrial chain.
First, on economic growth
Recently, many international organizations and institutions have been forecasting global economic growth, and the results have been similar. In October 2023, in the latest World Economic Outlook report released, the International Monetary Fund (IMF) predicts that global economic growth will continue to slow down this year and next, of which the economic growth rate is expected to be 3.0% in 2023 and 2.9% in 2024, which is lower than the historical (2000~2019) average of 3.8%. As a rule of thumb, a recession is a recession if the global economy grows below 3.0%, which means that the IMF's projections tell us that the global economy is still teetering on the brink of recession.
We generally divide the global economy into two broad groups, one is the advanced economy and the other is the emerging economy and the developing country. We are seeing a slowdown in advanced economies across the board, with the United States, Japan, and Europe slowing across the board this year, and next year and the year after that may be worse than this year. It is the slowdown in advanced economies, which account for more than 60.8% of global GDP, that has slowed down the growth of the world economy as a whole.
Figure 1 Growth in advanced economies has slowed
It should be noted that at the beginning of the 21st century, there have been exciting changes in the respective share of advanced and emerging economies in the global economy, and the basic trend is that the share of emerging economies is rising. In 2007, the share of advanced and emerging economies in global GDP was almost close. However, after several crises, advanced economies have slowed down, but their ability to cope with shocks is clearly not comparable to that of emerging economies, and the upward trend of the dollar index in recent years has led to a return to the relative position of the two groups after the impact of the pandemic. According to the IMF, at the end of 2022, advanced economies still accounted for 60.8% of global GDP, while the relative position of emerging economies has declined again. This means that the impact of the downturn in advanced economies as a whole on global growth is significant.
By contrast, the outlook for growth in emerging market and developing economies in 2023 and 2024 is "broadly stable," with the IMF expecting growth to reach 4.0% in 2023 and 4.1% in 2024. Among them, China's economic growth rate is expected to reach 5.2% this year and 4.5% next year, respectively, compared with the economic growth of developed countries in Europe and the United States, the mainland's growth forecast has a significant advantage, but the growth rate is on a downward trend, which deserves our great attention.
So, if we look at these two groups together, global economic growth is not optimistic.
Figure 2 Growth in emerging economies has not improved significantly
Second, on inflation
At the end of 2021, starting with the United States, there was a sudden rise in global inflation. Throughout history, in the 80 years since the 50s of the 20th century, inflation has only occurred in the 70~80s of the 20th century, which is caused by the excessive reliance on Keynesianism in the United States, and then neoliberalism prevailed, and inflation was quickly suppressed, so in the rest of the years since the 80s of the last century, the inflation rate only hovered around 2%. The sudden arrival of inflation in 2021 is obviously caused by multiple factors. On the supply side, the impact of the epidemic, the Ukraine crisis, and the reversal of the pattern of globalization have fundamentally eroded the stability of the supply chain, while on the demand side, the comprehensive easing of fiscal and monetary policies since the 21st century has provided liquidity support for inflation. In addition, the 40-year-long environment of low inflation and low interest rates before the pandemic has profoundly affected the expectations of the public and the authorities, leaving people at a loss for a while. For these reasons, inflation has suddenly returned to the world, making the traditional monetary policy seriously inadequate. Moreover, due to supply-side factors, sticking to traditional monetary policies such as balance sheet reduction and interest rate hikes will not only have a limited effect, but may also lead to a recession. This means that macroeconomic policies in countries around the world today are caught in a dilemma: if a strong tightening policy is adopted, it could exacerbate a recession, and if nothing is done, inflation could worsen. It can be said that the macroeconomic policies of all countries in the world are now seeking balance in this "knife edge". But whether inflation will persist for a long time depends fundamentally on the relationship between supply and demand. At present, most economies in the world practice a market economy system, and as long as there is a market economy, its basic tendency is to oversupply. This means that inflation is unlikely to worsen in the coming medium term, but we need to deal with more complex and profound structural contradictions if we have to fight against stubbornly high core inflation.
Figure 3 Inflation is declining
The rise in the consumer price index (CPI) in emerging economies has been more severe than in advanced economies. Figure 4 shows the changes in CPI in India, Russia, Brazil and China, and it is clear that the situation is not the same across countries, but China should be the best among the four economies. However, it is worth noting that since the beginning of the 21 st century, the price situation faced by the mainland has generally been a downward pressure, which shows that there are unique Chinese factors behind the mainland's economic structure and price trends. We do not advocate transcribing the concept of "deflation" to explain China's phenomenon, but it is certain that the reasons for the continued decline in prices need to be carefully studied and targeted policy measures need to be taken.
Figure 4 The rise in CPI in emerging economies has been relatively severe
3. On interest rates
Figure 5 shows the global interest rate curve from the 50s of the 20th century to the present. As can be seen from this curve, global interest rates have been low for most of the past 80 years, as has been the case with global price movements. In the past 80 years, there have only been two peaks in interest rates, one was from the 70s to the 80s of the 20th century, which lasted for nearly 20 years. At that time, hyperinflation was occurring in the United States, as well as in major Western advanced economies. The term "stagflation", which is often used in academia and industry in recent times, was coined at that time, and it is a combination of "stagnation" and "inflation" to describe the failure of the "Phillips curve", which is enshrined in macroeconomics. The high interest rates here are a testament to the extreme monetary policy adopted to deal with stagflation. Another high interest rate occurred in the second half of 2021, again in response to inflation and economic stagnation. When the current round of inflation first occurred, the vast majority of macro authorities thought it was a short-term supply shock, but later found that the situation was not so simple, and inflation was likely to continue, so they reintroduced the tool of high interest rates.
Now, with high inflation under control, high interest rates seem to have reached the point where the trend is reversed. To analyze the long-term trend of interest rates, we should mainly analyze the fundamentals of the economy, especially the comparative relationship between global savings and investment. Given that most countries in the world have a market economy, one of the main features of which is that savings outweigh investment, and that the trend of high inflation is largely under control, there is no need to continue high interest rates. As global interest rates tend to fall, so does the magnitude of the rise in real interest rates. Real interest rates have a greater impact on the non-financial sector of the real economy, and lower real interest rates are good news for economic recovery.
Figure 5 Global interest rates soared in 2022
Fourth, on debt
Since the beginning of the 21st century, the problem of debt has persisted. Recently, data released by the Institute of International Finance showed that the total global debt in the first quarter of 2023 increased by $8.3 trillion from the end of 2022 to $304.9 trillion. Correspondingly, global debt intensity has risen to 3.5 times. This fully shows that the efficiency of financial support for the real economy is declining, that is, in order to achieve quantitative GDP growth, we need to invest more and more financial resources, which further shows that most of our financial activities are in fact self-serving, and in reality there is a large number of financial services and the phenomenon of creating finance with finance. In short, the rise in financial intensity is a clear indication of the intensification of the phenomenon of "shifting from real to virtual".
The impact of debt on different countries is different. For emerging economies and developing countries, one of the salient problems is the 10 per cent increase in the share of total debt from the private sector over the past decade. As we all know, there are two main types of debt: official debt and private debt, and official debt is a loan provided by international organizations and governments. Academics generally refer to this type of loan as "soft debt", referring to its long duration and low interest rate. Because of the long maturities of loans, inflation can erode a significant portion of their principal, so official debt does not constitute a real burden on debtor countries. But private debt is different, and private debt must be repaid with real money. The Asian financial crisis at the end of the 20th century was due to the fact that the private debts of countries such as South Korea and Thailand had not been included in the national debt statistics for a long time, and once they defaulted, they could trigger a debt crisis. In that crisis, both Chinese mainland and Hong Kong were affected. The second is the problem of European countries. Generally speaking, Europe is a developed economy, but carefully separated, the economic development of some European countries and regions is relatively backward, and the subprime mortgage crisis is known as the "European pig five". In recent years, the debt problems of these countries have flare-up again.
Figure 6 illustrates intuitively that debt is a global problem. The solid blue line depicts the trend of U.S. debt, which can be seen to be the largest in the world, and it has been so for a long time, and it has intensified in recent years. At the same time, it also means that the United States, as the main issuer of international reserve currency, can sit on the seigniorage revenue from currency issuance. The solid red line depicts the trend of China's debt, which has been on the rise in recent years and requires serious attention.
Figure 6 Debt is a global problem
Fifth, the global future and the restructuring of the industrial chain
The discussion of the future of the global economy is primarily about the future of the US economy. Regarding the future of the U.S. economy, we believe there are three possible outcomes: a soft landing, mild stagflation, and a recession. Our view is that mild stagflation is the most likely scenario for the US going forward, which is expected to continue for two years.
Another very deep problem at the level of the real economy is the restructuring of the global industrial chain. This issue has had an increasing impact on the global economy since the beginning of the Sino-US trade friction. The study finds that there are four major trends in the restructuring of the global industrial chain: localization, regionalization, diversification and digitalization. After more than three years of adjustment, there are currently three chains initially formed: the first is the North American industrial chain centered on the United States, the second is the European industrial chain centered on Germany, and the third is the Asian industrial chain centered on China, Japan and South Korea. That is to say, the global manufacturing industry revolves around the United States, Germany, China, Japan and South Korea, and through cooperation with the industrial chain, supply chain and value chain of neighboring countries, three major centers of the global industrial chain with their own characteristics and advantages have been formed. It should be pointed out that among the three global industrial chains, the industrial chain centered on China, Japan and South Korea is the most loose, and several other industrial chains continue to erode this industrial chain. This fully demonstrates that the issue of cooperation in the Asia-Pacific region is of great importance to us and that we must take seriously.
Finally, back to judging the economic situation. At the beginning, we said that the global economic situation is not optimistic, but recently the International Economic Forum conducted a survey of global economists, and evaluated the economic development prospects of countries around the world through a variety of indicators. Among them, China is still the highest evaluation, and I believe that this is where the resilience and potential of China's economy lie.