The global economy draws a vague picture depending on geopolitical threats, populist growth targets, U.S.-focused financial expansion and the course of the Chinese economy. While growth has been relatively synchronized since the second half of last year, the normalization of U.S. monetary policy continues gradually. In particular, the U.S. Federal Reserve's (Fed) opposition to state-backed growth as of 2018 has had a negative impact on markets, especially on the unstable course of commodity prices.
On the other hand, the fragile economic activities that appear in emerging economies carry a great risk, especially for Europe. That the West, which exports mainly to countries with inadequate technologies, cannot get the yield it desires from countries such as Poland, Russia and Turkey, seems to be important in terms of its reluctant stance in money markets.
In the world's current economic system, growth without debt is both costly and relatively inefficient. In markets where capital inflows are not supported, the risk appetite is so low that it is impossible to find investors who want to invest in local currencies. In short, there is a serious problem at the point of the diversification of risk appetites and investment portfolios. This, of course, exerts serious pressure on the determination of governments' financial policies and budget deficits.
When we look at developing countries around the world, we see problems in both growth and quality over the past three years. Increases in productivity and investment in heavy industry, which are sources of long-term sustainable growth, have made no progress in recent years and real cost increases are sailing well above that. In addition to this problem on the supply side of the economy, macroeconomic fragilities are quite high. A surge in Chinese markets causes an immediate drop in Russian stock exchanges, while the rise in unemployment in Brazil pushes growth expectations down in U.S. markets. We are now very far from a world that only operates according to the economic conditions of G8 countries. Globalization might have been prosperous for those countries 30 years ago, but today it has become the greatest threat to their own economies.
Looking at the International Monetary Fund's (IMF) year-end figures for 2017, its global growth expectations rose 0.1 percent to reach 3.5 percent, while its 2019 expectation remained stable at 3.6 percent. In the case of country groups, its growth expectation for developing countries increased 0.1 point to 2 percent and its 2019 expectation was kept at 2 percent.
Taking into account global vulnerability factors, a 5 percent target, including the risk of inflation, seems perfectly rational for Turkey. In an environment where the inflationary trend in Turkey is solidifying to around 8 percent, differentiating from its competitors by obtaining a result above the 3 percent band is very important. The impact a fall by half in oil prices has on the growths of countries like Turkey and Mexico should not be ignored and the potential of this situation, which still contributes nearly $35 billion annually to gross domestic product (GDP), should be used to the max.
However, as both the IMF and European Central Bank (ECB) have cited, both the political and economic risks to the global economy are continuing this upward reaction. Aside from the increase in geopolitical risks, it can be said that the scenario in which U.S. President Donald Trump is dismissed from office as a result of the investigation into his relations with Russia constitutes the most fundamental risk. In addition to this, France's efforts to be involved in the Syrian war and the recently surfaced tensions between Israel and the Syrian regime are the biggest signals that the slowdown in demand may further increase. Although concerns of populism have declined with the end of elections on the European front, the fact that a strong economic recovery in the medium term is still not expected is one of the biggest factors causing growth figures to remain low. Growth pangs, or fears of not being able to grow, are now concentrated around two poles. The first is the stress the Fed caused in markets during its normalization period and the other is the strategy and risks China will take, especially in the equation of its growth-debt dynamics. By the end of 2018, global markets will have to confront these two challenges.
Why the world cannot grow is a question the classical neo-liberal economy can no longer answer. As long as the mechanism of resource allocation is not evenly distributed, these pangs will continue to be experienced. In order to ensure social welfare maximization, it is not states but companies that have reached global dimensions that decide what kind of goods and how much will be produced, and how much of it will be consumed. What treasury institutions, central banks or the Fed can do is confined to asset purchases and interest increases. While there is no consensus on when and how the downsizing of the balance sheet, which is the third step of policy normalization, will begin, it seems irrational to put such a strain on emerging economies.However, we should bear in mind that emerging market economies have negative credit ratings in Moody's most recent reports, and it is not a healthy approach to increase these countries' borrowing costs and wait for them to have current account deficits.
Making macroeconomic indicators deteriorate so that money markets rake in more money will cause even more serious problems in the medium term, even if not today. The fact that developed economies are reacting slowly against the win-win formula and do not want to compromise their gains is now a burden shouldered by the whole world. In an environment where the greatest risk for lending to developing countries is the expectation of a rapid slowdown in China's economy and the re-emergence of commodity price pressure, austerity measures will also deal a major blow to production. The fact that within this context South Africa, Mexico and Brazil are included among risky markets for 2018 is naturally important for investors to follow low-risk strategies.
We must not forget that swings in private consumption, public expenditure, private investment and export items, which are the four main motivators of growth, are risky. At the beginning of the 2000s, Russia's growth policy backfired, as it was exclusively sustained by private consumption and public expenditure. In recent years, Russian President Vladimir Putin's administration started to fix this situation with private investment and export diversification. In Turkey, as well, economic growth predominantly led by private investment and exports is among the government's ultimate goals.
In conclusion, the recent recovery in the global economy is relative. Growth figures will be shaped by the rise in oil prices and the relative stability of commodity prices. The problem will not be felt much as long as the resistance emerging economies' central banks show against inflation registers with government policies. For the time being, there is no yawning gap between the targeted levels of inflation, and the risk of deflation around the world seems to have dissipated for now. Weak productivity gains, demographics and high indebtedness are the most important structural problems. The world must find an urgent solution to this.
* Ph.D. researcher in Private Company Economic Research Department MENA at Swiss Business School
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