Home / Business / With Davos Approaching, the Global Economy Is Surging, but Growth Could Stall

With Davos Approaching, the Global Economy Is Surging, but Growth Could Stall

In some countries, including the United States, economists expect even better. The World Bank forecasts growth in the world’s biggest economy to accelerate to 2.5 percent this year, from 2.3 percent last year. Fathom Consulting, a London-based research firm, is even more bullish, recently raising its 2018 projection to 3.1 percent, figuring that the newly passed tax reform package will give the economy a short-term pop.

Yet there is also some concern that the global growth rate may reach its peak next year. The World Bank foresees that growth of world gross domestic product will taper off in 2019, to 3 percent, and 2.9 percent in 2020.

“We ended 2017 with a lot more momentum in the economy than we had expected,“ said Janet Henry, global chief economist at HSBC. “Momentum is likely to slow through 2018.”

Some key regions of the world are already expected to slow this year, including the eurozone and Japan. China, the world’s second-largest economy, could lose steam, too. The government announced this month that growth reached 6.9 percent in 2017, but economists generally don’t expect the economy to maintain that pace. The World Bank predicts a 6.4 percent expansion this year.

Policymakers in China are facing the difficult task of overhauling the economy’s growth model to rely more on household spending, which remains low compared with levels in other large economies. Traditionally, China has been propelled by high investment, but that has saddled the economy with too many factories in industries such as steel and a mounting burden of debt, now at about 260 percent of national output.

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The floor of the New York Stock Exchange. The World Bank forecasts growth in the United States to accelerate to 2.5 percent this year, from 2.3 percent last year.

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Drew Angerer/Getty Images

Most economists do not expect China to tumble into a financial crisis, like other debt-heavy emerging economies have in the past. But Beijing’s efforts to control the problem by curtailing the expansion of credit could dampen overall economic growth.

Chetan Ahya, global co-head of economics at Morgan Stanley, considers China one of the outside risks facing the world economy. Though he expects that Beijing will tread cautiously on tackling debt, tightening credit too rapidly, he warned, could spark a sharper slowdown in domestic demand. “You want to ensure that confidence on growth is not collapsing very quickly,” he said. “Once confidence goes down, you tend to see all sorts of challenges.”

That’s not the only danger lurking on economists’ radar. The recovery has been greased by the extremely supportive policies of the Federal Reserve in the United States and the central banks of the eurozone and Japan. But now, with improved growth, central bankers are expected to reduce these stimulus efforts, a move that could lead to higher interest rates.

Unwinding these programs, which included the buying of bonds on a massive scale, will also be tricky, as any surprises could spook investors and depress prices of stocks and other assets. Economists generally say they do not anticipate that central banks will tighten enough to significantly drag on growth in the near term. But an unexpected jump in inflation, beyond current expectations, could prod them to constrain money more rapidly, possibly posing a bigger threat to growth.

Concerns remain as well about a disruption to international trade, which would be especially damaging at the moment, because strong exports have boosted the current rebound. The worries center mainly on the Trump administration’s attempts to renegotiate pacts like the North American Free Trade Agreement and possibly take a tougher line on trade with China.

“The White House has become a risk factor,” said Andrew Kenningham, chief global economist at the research firm Capital Economics in London.

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A worker in India painting at a construction site. Some countries, including India and parts of the Middle East, have labor laws that are so rigid that they discourage employers from increasing staff, condemning many workers to informal and often poorly paid jobs.

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Arun Sankar/Agence France-Presse — Getty Images

What worries economists more, however, are long-term problems that continue to plague the world economy. Through global growth has improved, it still lags behind the pace before the financial crisis, when it increased at around 4 percent or more each year.

Meager gains in productivity are probably the biggest headache for economists. Without stronger improvements, sustaining economic growth becomes far more difficult. Economists recommend greater investment in infrastructure, especially in the developing world, which can lower business costs and enhance efficiency, and education and job training, to increase the skills of workers.

Another issue is widening income inequality within national economies. Not all segments of society are benefiting as they probably should from improved global economic performance.

Even with unemployment rates plunging — in Japan, for instance, to a remarkable 2.7 percent — wage growth has still been tepid compared with past periods of economic expansion. Because poor families tend to spend additional income more readily than rich ones, the concentration of wealth at the top could be depriving economies of consumer spending.

Ms. Henry of HSBC said she worried that the income amassed by the world’s wealthiest might be getting invested in bonds, property or other assets rather than investments that could enhance productivity. “At the moment, it doesn’t look like the savings of higher earners are going into productive investment,” she said. Income inequality “may already be starting to have a negative impact on growth.”

Distorted labor markets, too, need fixing. Some countries, including India and parts of the Middle East, have labor laws that are so rigid that they discourage employers from increasing staff, condemning many workers to informal and often poorly paid jobs. Making it easier and less costly for managers to hire and fire would probably increase incomes and improve the productivity of labor.

Mr. Devarajan of the World Bank worries that the robust economy may lead to complacency and delay such critical economic reforms. “The time to act may be now,” he said. “Because the costs of not doing it could be very high.”

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News credit : Nytimes

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