M Ziauddin
The government that would take control of the reins in Islamabad following the July 25, 2018 general elections is likely to be greeted by a world in a relatively more expansive mode economy-wise than how it had fared on this front over the past five years or so.
This encouraging outlook in the global economy is likely to have a positive impact on our exports and the demand for our manpower in the oil rich Middle East countries is also expected to increase as a result of a substantial increases in world oil prices offsetting in the process the anticipated increase in oil import bill to a large extent as remittances would also increase in step. Of course, the rate of inflation would not remain as subdued as it had remained over the last five years.
According to the OECD’s latest Economic Outlook released on May 30, 2018 in Paris the global economy is experiencing stronger growth, driven by a rebound in trade, higher investment and buoyant job creation, and supported by a very accommodative monetary policy and fiscal easing.
The pace of global expansion over the 2018-19 period is expected to hover near 4%, which is close to the long-term average. However, the Outlook also underlines that significant risks posed by trade tensions, financial market vulnerabilities and rising oil prices loom large, and more needed to be done to secure a strong and resilient medium-term improvement in living standards.
Low, albeit gradually rising interest rates coupled with fiscal easing in many countries is expected to continue underpinning the expansion, which would, it is presumed, see moderate rises in both wage growth and inflation. Unemployment is expected to drop to the lowest levels since 1980 in the OECD countries, but more is advised to be done to bring more people into the workforce.
“The economic expansion is set to continue for the coming two years, and the short-term growth outlook is more favourable than it has been for many years,” said OECD Secretary-General Angel Gurria. “However, the current recovery is still being supported by very accommodative monetary policy, and increasingly by fiscal easing. This suggests that strong, self-sustaining growth has not yet been attained.”
“Policymakers need to put greater focus on structural policies to boost skills and to improve productivity to achieve strong, sustainable and inclusive growth,” Gurria said.
The Outlook highlights a range of risks to the current expansion. Oil prices have risen significantly in the past year, and, if sustained, could add to inflation while softening real household income growth. The threat of trade restrictions has begun to adversely affect confidence, and, if such measures were implemented, they would negatively influence investment and jobs.
Risks also remain that the normalisation of interest rates in some economies, notably the United States, could expose financial vulnerabilities and tensions created by elevated risk-taking in financial markets and high debt, especially in emerging market economies with high levels of foreign currency debt. Pro-cyclical fiscal easing are said to exacerbate these risks.
The Outlook calls for reforms to be stepped up, against the background of favourable short-term conditions and the need to secure more robust and more inclusive growth. It urges countries to boost investment in education and skills, as part of improvements in the use of tax and spending policies to raise living standards across the income distribution. It recommends policies to boost job creation and business dynamism in the economy, including improvements to digital and physical infrastructure, enhanced R&D collaboration between universities and industry, reduced barriers to entry in professional services sectors and less red tape.
The expansion is set to persist over the next two years, with global GDP projected to rise by a close to 4% in 2018 and 2019. Growth in the OECD area is set to remain around 2½ per cent per annum, helped by fiscal easing in many economies, and will strengthen to close to 5% elsewhere.
Although job growth is likely to ease in advanced economies, the OECD-wide unemployment rate is projected to fall to its lowest level since 1980, with labour shortages intensifying in some countries. Wage and price inflation are accordingly projected to rise, but only moderately, given the apparent muted impact of resource pressures on inflation in recent years and the scope left in some economies to strengthen labour force participation and hours worked.
Global investment and trade rebounded last year, and are projected to continue to expand steadily in the next two years, provided trade tensions do not escalate further.
Even so, the prospects for a strong and sustained improvements in living standards in the medium-term remain weaker than prior to the crisis in both advanced and emerging market economies, reflecting less favourable demographic trends and the consequences for potential output growth of the past decade of sub-par investment and productivity outcomes.
While the short-term outlook remains favourable, downside risks prevail. The projected global growth rate of close to 4% is in line with the long-term average rate prior to the crisis, but the current expansion is still being supported by very accommodative monetary policy in the advanced economies and, increasingly, fiscal policy easing. This suggests that strong self-sustaining growth has yet to be attained. Trade protectionism has already begun to adversely affect confidence, and a further escalation would harm investment, jobs and living standards.
Geopolitical concerns have contributed to a substantial further rise in oil prices in recent weeks; if sustained, higher oil prices would add to inflation and soften household real income growth. Geopolitical risks also remain in Europe, with bond spreads widening recently in the euro area.
Risks also remain that the normalisation of interest rates in some economies, especially if it were to proceed rapidly and be accompanied by strong US dollar appreciation, could further expose financial vulnerabilities and tensions created by elevated risk-taking and high debt.
Financial market pressures have already appeared in some emerging market economies (EMEs), on the back of higher US bond yields and an appreciation of the US dollar, particularly in ones with large and rising domestic and external imbalances or sizeable US dollar-denominated external debt.
Against the backdrop of the stronger global economy, policy needs to focus on securing a more robust and resilient recovery of productivity, investment and living standards.
A gradual normalisation of monetary policy is needed, but to a varying degree across the major advanced economies. Continued clear communication about the path to normalisation is said to be essential to minimise the risk of financial market disruptions.
An active and timely deployment of prudential and supervisory policies is also said to be necessary to avoid an intensification of the risks from financial vulnerabilities in both advanced and emerging market economies.
Fiscal policy choices have been asked to be avoided being excessively pro-cyclical and be clearly focused on measures that help to strengthen medium-term growth and ensure that the recovery yields widespread benefits. Any margins from stronger growth are advised to be used to rebuild fiscal buffers, given high government debt and deficit levels in many countries and the limited room for policy manoeuvre if significant downside risks materialise.
Structural reform efforts have been advised to be revived in both advanced and emerging market economies to help sustain growth and allow the benefits of growth to be distributed more widely.
The current upswing, with strong job growth, are said to provide an opportune moment to rekindle structural reform efforts. Favourable cyclical conditions on the other hand are said to help maximise the benefits of reforms, whereas acting in crisis periods, which is often when reforms are implemented, can accentuate short-term costs.
Safeguarding the rules-based international trading system, avoiding an escalation of trade tensions, and enhancing multilateral co-operation are said to be essential to prevent the harm to longer-term growth prospects that would result from a retreat from open markets. Policy support is said to help sustain global growth. The global expansion at the same time is said to remain solid and broad-based, even though global GDP growth eased in the first quarter of 2018. Investment and trade growth are said to have picked up, contributing to widespread job creation.
Amongst the advanced economies, fiscal and monetary policy support is said to continue to help underpin activity, with the effects of still-accommodative monetary policy being reinforced by an easing of the fiscal stance in the majority of countries. Activity in the EMEs is said to have rebounded, boosted by improved global trade, higher commodity prices, and strong infrastructure investment in China and other Asian economies.
Financial conditions largely remain supportive, but said to have begun to tighten in recent months with declines in equity prices from elevated peaks, rising long-term interest rates and volatility picking up from the unusually low levels seen in recent years.
Some EMEs are said to have begun to experience increasing financial market pressures, particularly those with large and rising domestic and external imbalances or substantial US-dollar-denominated debt.
Oil prices have recently risen to around USD 80 per barrel, around 15% higher than at the start of the year, and USD 25 per barrel above their average level in 2017. Despite strong US production of oil, prices are said to have been pushed up by continued robust global demand, supply restraints from agreed production restrictions by OPEC and selected non-OPEC countries, severe production cutbacks in Venezuela, and expectations that geopolitical tensions will limit supply from Iran.
