Zhao Xue: Who can save the global economy

Whether the global economy can be saved from the brink of recession depends to a large extent on the policy trends of major countries such as the United States, China, and Germany, which still have policy space. This reflects the regional integration of the global economy over the past few decades, such as the North American Free Trade Area, the Asian Economic and Trade Circle and the Euro Area, and the core countries in these regions have played an increasingly important role in trade, economy, finance and so on.

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The combination of short- and long-term challenges, combined with the impact of the coronavirus, has led to a sudden increase in the risk of a global recession. Whether the global economy can be saved depends largely on three factors: U.S. politics, China's resumption of work, and Germany's finances.

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Since the beginning of this year, the global economy has continued to face various downside risks. At the beginning of the year, the geopolitical tensions between the United States and Iran and the drama of Brexit have not yet ended, the coronavirus (covid-19) began to spread around the world, coupled with the oil price war between Saudi Arabia and Russia, the prospects for the global economy have suddenly dimmed, and global financial markets have also fluctuated sharply. For the first time in history, U.S. stocks fell twice in a week to meltdown, and multinational stock markets staged a stop on the same day.

Looking around, the global economy is a chicken feather. A natural question is, who will be able to save the global economy at this time?

Before answering this question, it is first necessary to review the general situation of the global economy now.

In the short term, even before the virus outbreak, major global economies were in a phase of anemic growth. The fiscal stimulus effect of the United States in the early stage is gradually fading, Europe and Japan have not yet come out of low growth, China's economy is still trying to stabilize, and major emerging economies such as India and Brazil are still struggling with difficulties in the financial system and post-election politics. In this context, the coronavirus outbreak presents serious challenges in terms of confidence and liquidity, and the oil price war is undoubtedly worse.

Moreover, there are still structural problems in major economies. Many of these come from the after-effects of the policy stimulus of the previous crisis. For example, quantitative easing by the Federal Reserve after the 2008 crisis led to a rapid expansion of the balance sheet, and the original plan to reduce the balance sheet was difficult to implement continuously. China's four trillion yuan brought about by the high debt ratio, there is no good painless solution. The chronic diseases of the European banking system after the European debt crisis as a whole have been dragged down day by day, and there has been no significant improvement. The low growth brought about by the aging of Asian countries such as Japan and South Korea, and the continued pain caused by the collapse of indian shadow banks, will be difficult to change for a while and a half.

In addition, the small policy space and poor response of developed countries have caused a greater blow to the confidence of the real economy and financial markets. Even before the outbreak of the new crown, the monetary and fiscal policies of Japan and Europe were close to the limit. The Fed has shot policy bullets too quickly in the past few months, especially in the past two weeks, and has prematurely fallen into the trap of insufficient policy space. In the same period, the policy rate of central banks in other developed countries has dropped to zero or negative, and traditional monetary policy tools have all been sacrificed.

The macro context described above, combined with the covid-19 outbreak, has increased the risk of a global recession. In my opinion, in today's grim situation, whether the global economy can be saved, in addition to the process of fighting the epidemic itself, depends largely on three factors: the politics of the United States, the resumption of work in China, and the finances of Germany.

Politics of the United States

In the long run, the United States remains one of the most resilient countries. Given the lessons of the last crisis, regulators, financial institutions and the corporate sector have all remained vigilant enough about risks over the past decade, so the fundamentals are relatively healthy. Despite the recent sharp fluctuations in financial markets, the causes and transmission mechanisms are significantly different from previous financial crises. From the perspective of policy space, the United States still has enough policy space compared with many other developed countries. At present, the Fed's traditional monetary policy card has been played, but there are still unconventional weapons such as forward guidance and quantitative easing. Compared with 2008, the Fed has practical experience with the mechanisms, effects, flaws, etc. of these weapons. Fiscally, the U.S. does not lack room to cut taxes or increase spending in the short term, even if these put pressure on long-term fiscal sustainability.

However, the current outstanding problem in the United States is the lack of mutual trust and stalemate between the two parties, which limits the introduction of timely, effective, and large-scale fiscal measures to stabilize market expectations. In particular, the two parties' calculations in the election year, including the internal disputes between the two parties, have made it difficult for the United States to form a synergy to cope with the challenges of confidence and various sectors of the real economy brought by the virus. The future is that in the election year, the two parties can temporarily put aside their political differences and work together to fight the epidemic and promote the economy. If this can happen, a strong recovery in the U.S. economy and financial markets can be expected.

China resumed work

On the other hand, China's resumption of work, especially the corresponding policy measures, affects the global economy from both the demand and supply aspects. China is the locomotive of global economic growth, contributing more than 1/3 of the global economic growth rate. The quality of China's economic activity directly affects a considerable part of the total demand of the global economy, such as the impact on commodity markets such as energy and agricultural products. Not only that, after years of catching up, China is now also an important part of the global industrial chain. Many industries, such as automotive manufacturing and electronics, rely on components produced in China. Delays in resuming work in China will lead to insufficient inventories and stagnant production in these industries.

In terms of policy, China is also one of the few major economies that still has sufficient room for fiscal stimulus from traditional currencies. On the one hand, this has benefited from the overall cautious macro policy in the past few years, insisting on not using flood irrigation at the time of economic growth slowdown, and retaining more policy bullets. On the other hand, it comes from the fact that a few years ago, we have begun to interpret structural hidden dangers such as shadow banking and local finance. It should be pointed out that the strength and speed of China's policies depend on the government's assessment of short-term, medium- and long-term economic growth targets, as well as judgments on the external environment.

Therefore, in the case of the gradual subsidence of the epidemic, driven by the support of supporting policies, the speed of China's resumption of work will not only affect the degree of domestic employment and consumption recovery, but also play a key spillover effect on the trend of the global economy in the second half of the year.

Germany's finances

Even before the virus began, European economies were in a fragile recovery. The problems of the banking system in the wake of the European debt crisis have not been fully resolved, and the demand from many member countries remains weak. Under the impact of the current epidemic, the European economy has a high probability of falling into recession. At the same time, the ECB has almost all the policy bullets, and the room for stimulus that can be implemented in the future is very limited. In response to COVID-19, many countries have also used the few resources at their disposal.

However, it must not be forgotten that Germany, the strongest economic force in Europe, still has abundant financial reserves, which are enough to push the European economy out of the trough. However, convincing the German government, which has always been fiscally disciplined, to introduce a major fiscal stimulus is not easy. In the face of the pandemic and pressure from other countries in the eurozone, the German government has changed its attitude and began providing enough liquidity this week to get companies through the crisis, but these can only slow the impact of the virus. It can be said that whether Germany can relax debt constraints and determine whether the European economy can recover from the recession as soon as possible is a key variable in the global economic trend.

Based on the above views, whether the global economy can be saved from the brink of recession depends to a large extent on the policy trends of major countries that still have policy space in the United States, China, Germany and so on. This reflects the regional integration of the global economy over the past few decades, such as the North American Free Trade Area, the Asian Economic and Trade Circle and the Euro Area, and the core countries in these regions have played an increasingly important role in trade, economy, finance and so on.

In addition, it is worth noting that from the perspective of the epidemic and policy response, the policy formulation of various countries is increasingly affected by the economies and policies of other countries. The best-case scenario for the global economy is still for countries to coordinate policies and form synergies. This also shows from another aspect that globalization is still the trend of the times. Therefore, the anti-globalization that many people worry about may be just a false proposition.

(About the author of this article: Doctor of Economics, Carleton University, Canada, former global asset allocation investment manager of a large canadian pension fund, former economist of CICC in New York.) )

Source: Sina Finance

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