17:19 | 05/10/2016 Global Economy
Two leading economic institutions have recently announced grim warnings about the health of the world economy.
WTO Director General Roberto Azevedo (Source: wto.org)
The International Monetary Fund (IMF) warns that the global economy is at risk of slipping into a spiral of deflation while the World Trade Organisation (WTO) says that global economic growth is at its worst level since the financial crisis during the 2008-2009 period.
Such warnings come at a time as the future of the world economy is already bleak, especially when considering its performance over the past decade.
In a new assessment of global economic conditions, the IMF said many countries worldwide are battling disinflation due to weak global economic growth. If central banks around the world cannot halt this stall, and if companies and people increasingly believe they can't halt it, their economies risk sinking into a deflationary spiral.
The immediate results of the spiral would include falling prices, forcing companies to cut investment and consumers to tighten their budget, which eventually leads to economic stagnation. A side effect worth noting is that, according to the IMF, central banks will be unable to launch new financial stimulus packages.
The WTO forecasts that global GDP will increase by just 2.6% in 2016 and trade will grow at its lowest level since the Great Depression in the 1930s. The institution has cut its global trade growth forecast for 2016 to 1.7%, down sharply from the 2.8% estimate made in April. WTO Director General Roberto Azevedo warns that the dramatic slowing of trade growth is serious and should serve as a wake-up call.
In the global economic picture, there are only a few bright spots seen in the US, India and some Asian countries. In Europe, the Russian bear is forecast to continue its hibernation due to sharp falls in oil prices and languishing growth as a result of Western sanctions. The growth momentum of Eurozone economies remains weak and the pace of recovery differs between countries. Even the area’s economic engines such as Germany and France are also in a prolonged state of low growth. Meanwhile Brexit, the UK’s decision to leave the European Union, is expected to exert major impacts on the UK economy itself, as well as in Europe and all around the world. The IMF recently projected that UK growth would only reach 1.7% this year and 1.3% in 2017, down sharply from previous forecasts. The US economy, though considered not to be significantly impacted by Brexit, is also projected to grow at a mere 1.8% this year and next year.
Looking to East Asia, things do not appear much better in China, Japan and the Republic of Korea. The former chief economist of the IMF Ken Rogoff, now Professor of Economics at Harvard, recently warned that slowing growth in China was the greatest threat to the world economy. He said a “hard landing” for the Chinese economy could not be ruled out since the Bank of International Settlements stated that China’s amount of debt in relative to GDP stood at 30.1%, which is very high by international standards.
Japan’s economy has also been unable to reverse its course despite the aggressive implementation of Prime Minister Abe’s economic policy known as Abenomics, which advocates easing monetary policy, supporting exports and stimulating consumer spending.
Earlier this month, IMF Managing Director Christine Lagarde warned of the risk of low growth for the world economy with high debt, weak demand, eroding work forces and labour skills which were weakening incentives for investment and slowing productivity. The world economy is facing potential risks from prolonged low growth and rising inequality.
The fragility of the global economy requires governments around the world and international financial institutions to introduce new polices. If the current situation is not assessed properly and there aren’t any coordinated bold actions, the world economy risks sinking into another lost decade like what has happened over the past ten years./.