The
Emerging Global Scenario
In Modern times, no country can afford to live in
isolation. The economic liberalization and the increasing trade in commodities
and services under WTO have been responsible for accelerating the pace of
progress towards the border less world. We will examines
the nature of the operating environment for international business today.
We will review the trends in international business activity
and evaluate the various methods that firms can use to assess, enter and
develop non-domestic markets.
Before slowing down in the year 2007 the world
economy maintained its momentum with estimated overall output growth of 3.4 % between
the years 2002 to 2005. The pace and momentum of the global economy was slow in
2011 to 2.7%, and only 2.2% in 2012. Many economies continued to perform below
average and the growth in 2013 was again 2.4% only. It slightly recovered in
2014 to remain at 3.2%. The world output growth remained slow in the year 2015
at 3.1 %. The global growth has been projected at 3.4 percent in
2016 and 3.6 percent in 2017.
In
2015, global economic activity remained subdued. Growth in emerging market and
developing economies declined for the fifth consecutive year, while a modest
recovery continued in advanced economies.
The factors responsible
for slowdown are mainly:
Slowdown in China:
The recent slowdown and
rebalancing of economic activity in China away from investment and
manufacturing towards consumption and services. The Chinese slowdown has spill
over effect to
other economies through trade channels and weaker commodity prices, as well as
through diminishing confidence and increasing volatility in financial markets.
Lower Energy Prices:
Lower prices for energy
and commodities in recent years have built pressure on the prices of metal.
Although the lower prices should support global demand given a higher
propensity to spend in oil importers relative to oil exporters. But several
factors have dampened the positive impact of lower oil prices.
- Financial strains in many oil exporting countries reduced demand in
these countries.
- The lower oil prices has caused a notable impact on investment
in oil and gas extraction, also lowering aggregate demand.
- The pickup in consumption in oil importers has so far been somewhat
weaker than evidence from past episodes of oil price declines
- A gradual tightening of Monetary Policy in US
Advanced
Economies
Growth in advanced economies is projected to rise by 0.2 percentage
point in 2016 to 2.1 percent, and hold steady in 2017. Overall activity remains
resilient in the United States, supported by still-easy financial conditions
and strengthening housing and labour markets, but with dollar strength weighing
on manufacturing activity and lower oil prices curtailing investment in mining
structures and equipment. In the euro area, stronger private consumption
supported by lower oil prices and easy financial conditions is outweighing a
weakening in net exports. Growth in Japan is also expected to firm in 2016, on
the back of fiscal support, lower oil prices, accommodative financial
conditions, and rising incomes.
Emerging
Market and Developing Economies[1]
Growth in 2015 was only 4 percent the lowest since the 2008–09 financial
crisis. Growth in emerging market and
developing economies is projected at 4.3% and 4.7% percent in 2016 and 2017,
respectively. China
and India performed well and continued the fastest growing economies, but the
US recession had put a break on the speed of these economies. The performance
of developing economies had also been impressive during 2003 to 2007 per capita
GDP of these countries increased by 30% compared to 10% in the G-7 countries.
After the extended period of excessive growth China’s growth rate has slowed
down mainly by slowing down of investment and export in 2015-16. Growth
in China is expected to slow to 6.3 percent in 2016 and 6.0 percent in 2017,
primarily reflecting weaker investment growth as the economy continues to
rebalance. India and the rest of emerging Asia are generally projected to
continue growing at a robust pace, although with some countries facing strong
headwinds from China’s economic rebalancing and global manufacturing weakness.
The
slowdown had affected many economies of the world as China is the top 10 trade
partner of more than 100 countries that account for nearly 80 % of the world
GDP. These trade effects are both direct (reduced demand for trading partners’
products) and indirect (impact on world prices for specific goods that China
imports––for example, commodities), affecting other countries’ exchange rates
and asset markets.
China is a major importer across a range of commodities,
especially metals, for which it accounted for about 40 percent of total global
demand in 2014.
China’s investment slowdown has had a significant impact on the
demand for and prices of those commodities. Excess capacity of Chinese
manufacturing sector has contributed to the lowering prices.
Commodity markets pose two-sided risks. On the downside, further
declines in commodity prices would worsen the outlook for already-fragile
commodity producers, and increasing yields on energy sector debt threaten a
broader tightening of credit conditions. On the upside, the recent decline in
oil prices may provide a stronger boost to demand in oil importers than
currently envisaged, including through consumers’ possible perception that
prices will remain lower for longer.
The strong demand of
primary commodities including Africa contributed to the improved external and
fiscal balances a decade ago. These have paved the way for more expansionary
policies, and for a wide spread recovery in interest rates.
Although problems
of strategies of development pattern and rates of growth may vary all national
economies were on growth path till 2007. Africa also achieved a growth rate of
6 per cent in 2007, while growth rate in Latin America and west Asia was around
5 per cent. Indeed, since the beginning of the 21st century till
2007 per capita GDP in Africa, West Asia and Latin America has increased by
more than 15 per cent, a rate not seen in these regimes since the early 1980s. Aggregate
GDP in Latin America and the Caribbean is now projected to contract in 2016 as well,
albeit at a smaller rate than in 2015, despite positive growth in most
countries in the region.
This reflects
the recession in Brazil and other countries in economic distress. Higher growth
is projected for the Middle East, but lower oil prices, and in some cases
geopolitical tensions and domestic strife, continue to weigh on the outlook. Emerging
Europe is projected to continue growing at a broadly steady pace, albeit with
some slowing in 2016.
Russia, which continues to adjust to low oil prices and
Western sanctions, is expected to remain in recession in 2016. Other economies
of the Commonwealth of Independent States are caught in the slipstream of
Russia’s recession and geopolitical tensions, and in some cases affected by
domestic structural weaknesses and low oil prices; they are projected to expand
only modestly in 2016 but gather speed in 2017. Most countries in sub-Saharan
Africa will see a gradual pickup in growth, but with lower commodity prices, to
rates that are lower than those seen over the past decade. This mainly reflects
the continued adjustment to lower commodity prices and higher borrowing costs,
which are weighing heavily on some of the region’s largest economies (Angola,
Nigeria, and South Africa) as well as a number of smaller commodity exporters.
Growing
exports and net capital outflows from developing countries:
The dynamics of
overall growth in developing countries have been stimulated by strong growth in
developing economies. Real exports of developing economies more than doubled
during 1998 to 2006 where as those of G-7 rose by less than 50 per cent. As a
result of this the share of developing countries in global trade rose from 29
per cent in 1996 to 37 per cent in 2006. • Trade experienced fairly strong
growth from 1995 to 2001, followed by a boom from 2002 to 2008 accompanied by
rising commodity prices. Following the financial crisis in 2008, trade fell
steeply in 2009 by nearly 22% before rebounding strongly in 2010 and 2011.
However, trade growth since then has been unusually weak. The 2008 financial
crisis, triggered by the subprime lending crisis in the United States, led to a
global recession between 2008 and 2011. The volume of world exports plunged 12
per cent in 2009 while world gross domestic product (GDP) dropped 2 per cent.
Table -1
reveals that world trade expanded vigorously in 2006 and total exports grew by
almost 15 Per cent in current dollar prices with an increase in volume terms of
8 per cent and in unit value terms of 6.5 per cent. In 2006 export, expansion
was evenly distributed among developed and developing countries. USA also
registered strong export growth of 10 per cent its highest since the beginning of
the 2000s. China and India also experienced higher growth in export volumes
e.g. China got 25% growth whereas India’s export growth was 14 per cent. China
overtook Japan as the leading Asian exporter in 2004, three years after its
accession to the WTO. China surpassed the United States in 2007 and Germany in
2009 to become the world’s leading exporter.
The share of developing economies’ exports in world trade increased from
26 per cent in 1995 to 44 per cent in 2014 while the share of developed
economies’ exports decreased from 70 per cent to 52 per cent. Among the most
significant accessions in terms of trade volume was in December 2001, when
China became the WTO’s 143rd member. Before joining the WTO, merchandise
exports from China accounted for 3 per cent of total world exports in 1995,
increasing to just 4 per cent by 2000. In the years following WTO accession,
China has shown rapid gains in merchandise exports. Its share of the world’s
total exports was 5 per cent in 2002, growing to 6 per cent in 2003 and 2004.
By 2014, China’s merchandise exports accounted for 12 per cent of the world’s
trade merchandise exports.
The export
performance of other countries in East and South Asia was also good. The
factors responsible for this robust growth were growing global demand and
increased intra-regional trade in manufacturing. Greater integration with EU is
also the reason for increasing trade volumes in South-East Europe, but in these
countries and CIS growth in imports (by volume) was higher than growth in exports
(by volume).
Export performance (in
volume terms) was less buoyant in Africa, Latin America and in Caribbean and
West Asia. In the year 2004, these countries experienced a rapid expansion in
oil exports that could not maintain its momentum in 2005 and 2006 before slowing
down. Export volumes were relatively stable in Africa and west Asia and
increased by 4 % in Latin America and Caribbean. The current figures have been
given in Appendix-I.
One: the year of political populism?
2016 could become a year marked by political populism. Weak economic activity and low productivity growth mean that real wages and consumption are likely to continue to be disappointing. When reality is coming short of expectations, there are grievances to be exploited. Donald Trump, Jeremy Corbyn, Alexis Tsipras, Nigel Farage, Marine Le Pen, Bernie Sanders, Pablo Iglesias Turrión and many others are taking advantage of stagnating living standards and increasing economic insecurity.
A number of factors are reinforcing populism and discontent. Job security is undermined by global competition, digitalisation and robotisation. New work opportunities ahead are more likely to be short-term contracts, part-time jobs, self-employment without full social benefits and full job security. The so-called “Uber” class of insecure workers is a new reality to be dealt with. The demands for education, expert knowledge and social skills have taken a quantum leap upwards and increased the threshold for people seeking to enter the labour market. Unionization is on the retreat. Increased insecurity in labour markets, the weaker negotiation power of the unions and low productivity are setting narrow limitations for wage negotiations and real wages.
In a period when most advanced economies needs strong governments to implement far-reaching structural reforms, voters are favouring shorttermism and asking for simple solutions. To restore political trust, governments needs to deliver real wage increases, more jobs and better welfare. This can only happen if growth is revitalised by reforms to increase labour market flexibility and to improve the business climate.
There is a clear risk that the fear of political populism will undermine the way leaders deal with long-term challenges and thereby creates a vicious negative spiral where disappointment further weakens trust in governments.
Two: global insecurity and the refugee crisis
US presidential elections is a major political event during 2016. From a global perspective, the key issue is whether the President Trump will be able to restore the US as a global force for stability after the apparent lethargy of President Obama’s administration.
Europe needs to step up its ability to deal with emerging security issues, although that is an unlikely outcome without leadership from the USA. The tragic events in Paris have created a momentum for a coalition bringing the US, France, the United Kingdom and, unexpectedly, also Russia together for global security risk.
The refugee crises in Europe will remain a major factor during 2016. UN estimates indicate that over one million people have entered Europe with the intention of claiming asylum during 2015. Germany, Sweden, Hungary, Austria and Italy have been the most affected countries in Europe.The historical pattern has been that it takes a few years before the refugee numbers normalise after a period of conflict. The number of refugees coming to Europe is most likely going to be lower in 2016, but they will remain much higher than the long-term average for both 2016 and 2017.
In the short term, the task of integrating such a large number of people will be a challenge. In Sweden the historical experience has been that people from Syria have integrated well into the labour market. However, to be able to integrate a large number of people coming from a much less developed country Looking ahead it is likely that unemployment will be somewhat higher in 2017 and 2018 and this will dampen wage pressure and inflation pressure somewhat.
Three: Britain’s exit from the EU:
A key factor shaping Europe’s political future in the decades to come is the referendum on the UK’s membership of the EU. The United Kingdom decided to move out from the European Union. The economic and political consequences of a British move towards isolationism are yet any bodies guess.
The political balance in Europe would shift from the idea of a Europe open to free trade and dynamic markets, turning the balance towards a more bureaucratic and centralising perspective. Europe and the UK would both be in a much worse position in the competition with the United States, China, Japan and India. For the UK, the long-term economic consequences are likely to be deeply concerning.
Four: Russia’s role in the world
Another political factor contributing to financial uncertainty is Russia. At the end of 2015, President Putin has rapidly repositioned Russia from being the outsider rocking the boat to a constructive force dealing with Daesh in Syria and Iraq. The repositioning is obviously fragile. Putin has in no way backed down in principle from the aggressive stance in the conflict in eastern Ukraine. So far the Russian intervention seems to have provided more support for President Al-Assad than actual damage to Daesh.
In the long run, Russia is likely to be a declining power under the current regime. Low fertility rates and premature alcohol-related death among men, combined with excessive dependence on natural resources rather than productivity and innovations, are undermining the long-term prospects. But in the short run, any neighbouring country that shows signs of weakness face the risk that Russia will try to exploit the situation. President Putin has been a master of navigating the age of populism and could revert to the anti-western rhetoric at any point of time.
Five: weak growth, choppy markets
Global growth will be weak next year. Furthermore, we are also likely to see substantial turmoil in financial markets. The combination of the recovery in the US and, even if weaker, in Europe, as well as a deceleration of growth in China is creating uncertainty for the financial markets. The extraordinary monetary policy measures over the last few years have pumped short-term money into the global financial system. In combination with low liquidity in markets, partly due to the new regulatory structures that are reshaping banking everywhere, this has set the tone for turbulence.
The potential is clearly there. Many start-up companies have been printing very strong growth numbers for years, but the macro-economic impact has so far been on the weaker side because the growth has come from a low level. Every year this is gradually changing. When more and more people do their shopping and banking online that will also mean that the broader implications becomes more pronounced. The pressure on existing firms to adapt to increased competition is likely to mean that prices and profit margins are being squeezed.
Six: China’s reforms
If inflation expectations in the US are a key factor shaping the financial year of 2016, reforms in China are on another scale. If China is able to gradually move forward with rebalancing the economy from investments to consumption, that could open a path towards more sustainable growth and a gradual return of optimism in the Chinese business sector.
The Chinese government has many times, not least at the last meeting in Davos and at the Dalian summit, stated its ambition to push forward with reforms to open the economy and continue the transformation towards a well-functioning market economy. The downside risk seems to be that these reforms are dependent on the ability to deal with resistance from special interest groups, including state-owned enterprises and more conservative centres of power. For the global economy, it is key to monitor any sign that reforms are being accelerated and that resistance to change is being pushed backwards.
Any sign that a credit contraction is hampering growth would imply that it is necessary for the People’s Bank of China, PBOC, to push monetary policy in an expansionary direction. In such a scenario, the RMB would weaken and that would imply second round depreciation in the rest of Asia. In any such scenario we would also see continued turbulence on commodity markets as well. Commodity prices are likely to contribute to the low-inflation environment. It will take time before we see the recovery of the super-cycle.
It is important to underline how important China is for the rest of the emerging market countries. Growth in Asia, Latin America and Africa has been bolstered by the growing demand for iron ore, copper and oil from China. If China succeeds in dealing with domestic challenges, that would also contribute to reviving optimism in emerging markets.
It is important to take on board the fundamental optimism that globalisation is bringing to emerging markets. According to the IMF forecast for 2016 there will be more than 3.4 billion people living in countries with a GDP growing faster than 6%. A growth rate of 6% means that the total economy will triple in two decades. That is the fastest transformation out of poverty that humanity has ever experience. Whether 2016 will bring a revival of the fundamental emerging market story or a year of disappointment is an open question, and the more market pressure is seen as an argument for reform the better the outcome will be. 2016 is likely to be a difficult year. Growth is increasing, led by the recovery in the US and other advanced economies, but populism, geopolitical risks and market turmoil are likely to cast some shadows over the optimism
Forecast
Revisions
Overall,
forecasts for global growth have been revised downward by 0.2 percentage point
for both 2016 and 2017. Prospects for global trade growth have also been marked
down by more than ½ percentage point for 2016 and 2017, reflecting developments
in China as well as distressed economies.
Unless
the key transitions in the world economy are successfully navigated, global
growth could be derailed. Downside risks, which are particularly prominent for
emerging market and developing economies, include the following:
- A sharper-than-expected
slowdown along China’s needed transition to more balanced growth, with
more international spill overs through trade, commodity prices, and
confidence, with attendant effects on global financial markets and
currency valuations.
- Adverse corporate
balance sheet effects and funding challenges related to potential further
dollar appreciation and tighter global financing conditions as the United
States exits from extraordinarily accommodative monetary policy.
- A sudden rise in global
risk aversion, regardless of the trigger, leading to sharp further
depreciations and possible financial strains in vulnerable emerging market
economies. Indeed, in an environment of higher risk aversion and market volatility,
even idiosyncratic shocks in a relatively large emerging market or
developing economy could generate broader contagion effects.
- An escalation of
ongoing geopolitical tensions in a number of regions affecting confidence
and disrupting global trade, financial, and tourism flows.
Policy
Priorities
As per the World Economic Outlook published by IMF in 2016 the projected pickup
in growth being once again weaker than previously expected and the balance of
risks remaining tilted to the downside, raising actual and potential output
through a mix of demand support and structural reforms is even more urgent.
In advanced economies,
where inflation rates are still well below central banks’ targets,
accommodative monetary policy remains essential. Where conditions allow,
near-term fiscal policy should be more supportive of the recovery, especially
through investments that would augment future productive capital. Fiscal
consolidation, where warranted by fiscal imbalances, should be growth friendly
and equitable. Efforts to raise potential output through structural reforms
remain critical.
Although the structural reform agenda should be country
specific, common areas of focus should include strengthening labor market
participation and trend employment, tackling legacy debt overhang, and reducing
barriers to entry in product and services markets. In Europe, where the tide of
refugees is presenting major challenges to the absorptive capacity of European
Union labor markets and testing political systems, policy actions to support
the integration of migrants into the labour force are critical to allay
concerns about social exclusion and long-term fiscal costs, and unlock the
potential long-term economic benefits of the refugee inflow.
In emerging market and
developing economies, policy priorities are varied given the diversity in
conditions. Policymakers in emerging market
and developing economies need to press on with structural reforms to alleviate
infrastructure bottlenecks, facilitate a dynamic and innovation-friendly
business environment, and bolster human capital. Deepening local capital
markets, improving fiscal revenue mobilization, and diversifying exports away
from commodities are also ongoing challenges in many of these economies.
Appendix-I: Merchandise
trade volume and real GDP, 2012-2017a
Annual % change
Figures for 2016 and
2017 are projections.
b Other regions comprise Africa, Commonwealth of Independent States and Middle East.
Sources: WTO Secretariat for trade, consensus estimates for GDP.
b Other regions comprise Africa, Commonwealth of Independent States and Middle East.
Sources: WTO Secretariat for trade, consensus estimates for GDP.
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