Deputy-Director, Institute of World Economics and Politics, Chinese Academy of Social Sciences

ZHANG YUYAN

Director, Institute of World Economics and Politics, Chinese Academy of Social Sciences

A WORLD ECONOMY CORNERED BY LONG-TERM CHALLENGES

YAO ZHIZHONG

Deputy-Director, Institute of World Economics and Politics, Chinese Academy of Social Sciences

ZHANG YUYAN

Director, Institute of World Economics and Politics, Chinese Academy of Social Sciences

The world economic growth in 2016, counted on the Purchasing Power Parity (PPP), was 3.1%, a drop somewhat from that of 2015, global growth rate continuing to slow down, global debts continuing to increase, international financial market becoming more fragile and international trade and investment becoming more bleak. As gap of household income and wealth widens and anti-globalization tendency is on the increase, the world economy is in face of quite a few challenges. In regard to the major challenges facing the world economy, the G20 Hangzhou Summit put forward a series of policy measures and action plans includingthe G20 Blueprint on Innovative Growth, the G20 Structural Reform Agenda, the G20 Strategy for Global Trade Growthandthe G20 Guiding Principles for Global Investment Policymaking, aiming to promote strong, sustainable and inclusive growth of the world economy.

OVERALL SITUATION OF THE WORLD ECONOMY

1. Economy Growth Rate Further Slows Down

In 2016, world economic growth fell short of general expectations, global growth rate dropping somehow from 2015, mainly owing to the marked drop in the growth rate of developed economies, whereas emerging markets and developing economy were hopeful to end the tendency of declined growth rate for five years running. According to the figures of the IMF forecast, the world economic growth rate of 2016 saw a 0.1% drop from that of 2015, growth rate of developed economies being 1.6% with a half percentage drop from the figure of 2015 with marked decline in the growth rate of the US and the Euro zone. The growth rate of emerging markets and developing economies was 4.2% with a 0.2 percentage rise from the figure of 2015.

2. Improvement on the Labor MarketIs Sluggish

Although unemployment in the US fell to 4.6%, labor participation declined from 63% in March 2016 to 62.7% in November of the year. European labor market is in the process of improvement, overall unemployment dropping from its peak of 11% in May 2013 to 8.4% in September 2016. However, there has been a drop in both the declining figures of the unemployed and declining rate of unemployment in Europe. Labor market performance varies significantly between emerging economies. In India and Vietnam, both being fast growing and under favorable economic situation, there has been continued decline in unemployment rate since 2010. At the other end, labor market in some of the other emerging economies is in the process of continued deterioration. For instance, unemployment in South Africa increased from 25.5% in September 2015 to 27.1% in September 2016.

3. Price Level Increases Somehow

The CPI of the US started to go up again from zero growth in September2015 and by October 2016 reached 1.6% year on year. CPI of Europe has gradually moved out of the predicament of zero increase and by October 2016 the Harmonized Index of Consumer Prices (HICP) of the EU reached half a percentage year on year. Though Japan has continued to enhance its QE policy, going as far as adopting the policy of negative interest, it has been unsuccessful in preventing its economy from getting into the predicament of deflation. Among emerging markets and developing countries, Russia, Brazil and India that had seen serious inflation attained marked results in controlling inflation in 2016 whereas South Africa that had undergone not so serious inflation saw inflation increasing.

4. International Trade Becomes More Bleak

According to the figures of the World Trade Organization (WTO), the gross world export in goods began negative growth in the fourth quarter of 2014, reaching the peak of atrophy of -15.4% year on year. The negative growth has narrowed somehow since, narrowing to -1.1% by September 2016. Excluding price factors, the real growth rate of gross world export has continued to drop year on year. With bleak international trade, the risks of trade protectionism and de-globalization are on the rise.

5. Activities of Foreign Direct Investment Die Down

The year of 2016 saw marked decrease in global merger transaction rate, leading to slow-down in global FDI activities. In the first half of the year, the inflow of global FDI declined by 5% and it is estimated to decline by 10%-15% for the whole year. Comparing to 2016, foreign direct investment will grow mildly in 2017 but will fail to reach its pre-crisis size. Though it is difficult forthe G20 Guiding Principles for Global Investment Policymakingto stimulate foreign direct investment, it will play the role of corner stone for true multiple international investment agreements in further steps.

The Federal Reserve's hintsabout interest rate hike caused the sharp appreciation of major currencies at the beginning of the year and their significant depreciation at the end of the year. On December 14, 2016, Federal Reserve Chair Janet Yellen announced at a press conference in Washington that the target range for the federal funds rate would be raised by 25% to reach the level of 0.5%-0.75%.

6. Debt Level Continues to Rise

In 2016, global government debts continued to increase. The proportion of gross government debts of developed economies against the GDP rose from 105.4% in 2015 to 108.6% in 2016, the figure for emerging markets and developing economies rising from 44.8% in 2015 to 47.3% in 2016. The figure for some of the latter economies such as Brazil, Egypt and Vietnam was above the warning line of 60% and rising, with latent risks of debt crisis moving up. Household and corporate debts kept accumulating, leading to continued escalation of gross global nonfinancial debt in proportion toGDP.

7. Financial Market Keeps Being Turbulent

In 2016, all major economies around the global maintained a flexible monetary policy, with rising price of capital market and frequent fluctuation in foreign exchange market. Anticipating the Federal Reserve to raise interest rate, major currencies in general underwent the process of appreciationat the beginning of the year and depreciation by the year's end. Between the outset of the year and May 2, the Euro appreciated by 6.2% against the US Dollar, the Japanese Yen appreciated by 13% and the RMB, by 0.6%. Between May 3 and November 25, 2016, the Euro depreciated by 8.1% against the US Dollar, the Japanese Yen depreciated by 6.0% and the RMB, by 6.7%. Owing to the Brexit referendum, the British pound sterlingremained quite weak throughout 2016, depreciating by 9% against the US Dollar on the first day after the referendum and by 14% accumulatively in two weeks thereafter.

8. Commodity Market Operates within Mid and Low-Price Range

By January 2016, international commodity price bottomed out, but in general the price rise was mild and gradually lost dynamics by the second half of the year, the market operating within the mid and low-price range throughout the year. By July 2016, theglobal comprehensive commodity price index counted on the US dollars increased by 14.5% against January of the year.By September 2016, the commodity price index on the US dollars decreased by 2.0% against July of the year. The average price of crude oil was US$108.4 per barrel in June 2014, which had since fallen gradually and was down to US$29.92 per barrel by January 2016. Having bottomed out since, it reached US$45.3 by November 2016.

Crude oil pricesare expected to rise somewhat in 2017 in light of OPEC's agreement to cut production and Russia's oil production cut promise. The picture shows Russia's oil platform Prirazlomnaya.

MAJOR CHALLENGES IN FACE OF THE WORLD ECONOMY

1. Potential Growth Rate Decreases

The world economic recovery remains sluggish and the GDP growth rate keeps declining, which attributes to weak global demand and, more important, to decrease in potential growth rate of the world economy. The drop in potential global growth rate arises from combined effects of decline in labor supply and labor productivity. According to the counting of the Conference Board, contribution of labor supply to global economic growth dropped from 0.6% between 1999 and 2006 to 0.4% between 2007 and 2015, and increase of labor productivity declined from 2.7% per year between 1999 and 2006 to 2.1% per year between 2007 and 2013, which declined further afterwards and by 2015 growth rate of global labor productivity was down to 1.5%. The decline of growth rate of labor productivity is mainly because of inadequate global investment and slow growth of total factor productivity. The growth rate of global total factor productivity declined from 0.9% between 1999 and 2006 to 0.1% between 2007 and 2013, going down to almost zero growth in the following years. It is impossible for short-term macro-economic policy to deal with the decline of potential growth rates. It is necessary for countries to promote a strong global economic growth by seeking structural reform. However, structural reforms more often than not touch on the existing interest structure and their smooth progress depends on countries for efforts to overcome political resistance.

2. Fragility of Financial Market Increases

The continued rise on global debt level has increased fragility of financial market. According to the estimates of the Bank for International Settlements, the ratio of global non-financial debt against GDP rose from 206.4% by the end of 2015 to 245.3% in the first quarter of 2016. Global low interest rates and negative interest policy adopted central banks of some of the countries have further increased fragility of the financial market. Low and negative interest rates force long-term investors to switch from fixed income capital investment to high-risk investment, which will add to the risks in the capital market in the short term andaffect the stability of those capital corporations in the long term. Continued rise in global debt level and low and negative interest policy are the sword of Damocle shanging over the head of the financial market, being possible to trigger off the next financial crisis any time.

3. The US Becomes the Source of Instability for the World Economy

After Donald Trump becomes US President, he will make major readjustment on US foreign and domestic policies. Once he honors his campaign promises or part of his campaign promises for protectionist policies, he will bring about negative effects to the outside world and may trigger off concentrated adoption of protectionist policies across the globe. Changes on expectation for US interest raise will also stir up international financial market repeatedly. Since November 2016, as expectations increase for US Federal Reserve to raise interest rate, international capital has begun to flow out of emerging economies and to the US, leading to the soaring index of the US dollar and marked depreciation of currencies of other countries, particularly emerging economies. This situation will occur repeatedly with continued fluctuation of the US economy and changes on expectation if interest rate will be raised for the dollar, and so also will be turbulence in international financial market.

4. Growth of International Trade and Investment Loses Steam

Low growth of international trade has become an important constraint on global economic recovery. The bleak international trade attributes to inherent factors of change on international trade system and international economic pattern. Such factors include the switch of relatively more dependence of world economic growth on manufacturing to that of services, with less trade in manufactured goods from economic growth than in the past; expansion on world value chain losing speed with less international trade from repeated transnational shipments of semi-finished products; and the size of foreign direct investment has never recovered the pre-crisis level and it is estimated that its growth will be relatively slow in years to come. The bleak foreign direct investment is related to three factors. First, access to foreign direct investment and advancement of openness are slow to come by. Secondly, developed economies begin to reemphasize the development of local manufacturing industries. And thirdly, crack-down on havens of tax evasion and international action plans against erosion of tax base and transfer of profit has, to a degree, depressed transnational investment. It becomes a major challenge to the world economy to shore up international trade and investment.

5. Income and Wealth Gap Widens

Global income in equality exists both between countries and within a country. In 2014, the richest country in the world was Norway, with a per capita national income of US$103000 whereas the poorest one was Burundi, with a per capita national income of merely US$250. The per capita national incomeof the richest country was 412 times of that of the poorest country. Within quite a few countries, serious income inequality exists and keeps rising. For instance, in the US, the Gini coefficient was only 0.37 in 1986 and by 2014 it rose to 0.41. Income inequality also leads to concentration of more and more social wealth in the hands of a few people. As the Global Wealth Report 2016 published by the Credit Suisse, the richest percentile of people owns over half world the world's wealth. Increased inequality not only leads to more and more serious social division and conflicts but also becomes an important source of many international conflicts.

6. Anti-Globalization Tendencies Increasingly Stand out

Generally speaking, international trade and investment always benefit some of the people within a country at the cost of others. If there is a working interest compensation system within an economy, the loss of disadvantaged groups in international trade and investment will be made up for to a certain degree, leading to relative smooth going of economic open-up and advancement of globalization. If those groups at a loss are not compensated, they will be opposed to openup and globalization. Bleak trade and investment reduce gains from openup. The weak world economic growth also decreases compensation and other opportunities for the groups at a loss in open-up whereas the forces against further open-up and globalization gradually gains strength. The phenomena of Brexit, the adoption of protectionist trade and investment policy by one country after another, the slow progress in trade negotiations and the election of Donald Trump as US President are all expressions of ant-globalization tendencies. The antiglobalization movement will lead to a mutually disunited, locked-up and beggar-thy-neighbor world and will obstruct prosperity of the world economy.

PROSPECT OF WORLD ECONOMY IN 2017

We predict that the situation of world economic growth in 2017 will not be optimistic, growth rate on the PPP counting being about 3.0%. Our estimates are lower than that of the IMF and other international organizations, which reflects our concerns about downward movement of potential growth rate of the world, increased fragility of the financial market, antiglobalization tendencies, readjustment of US polity, political strives within the EU, refugee crisis, the process of Brexit and deflation of Japanese Yen. Beside, we predict that in 2017 commodity price will continue to operate in the middle and lower range and go slightly upward. Considering that the OPEC countries have reached agreement on cutting back oil output and non-OPEC countries like Russia are also committed to reduction of oil output, the price of crude oil will move up somehow in 2017, exceeding US$60 per barrel.

10.19422/j.cnki.cn10-1398/d.2017.01.005