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Editorial: Keep vigilance in face of heap of risks to global economy / Seek flexible policy management for growth

  • January 6, 2019
  • , The Japan News , 07:48 p.m.
  • English Press

Will stable growth be maintained by appropriately dealing with the downward risks to the economy? The global economy will find itself at a major crossroads in 2019.


Financial markets had a turbulent start to the New Year, with U.S. stock prices fluctuating widely.


A prevailing view expects the global economy this year to hold firm with growth at the mid-3-percent level. Yet, with mountainous heaps of causes for concern on the path ahead, constant vigilance is required.


The relevant authorities in each country need to manage policies flexibly and cooperate closely among one another.


Shadows in U.S. strength


This year, too, it will probably be the U.S. economic trend that will affect the course of events in the global economy.


The current U.S. economic situation is strong. Its growth rate exceeds 3 percent, while jobless rates have been hovering at record-low levels.


Yet the effects of the massive tax cuts, which had underpinned the U.S. economy so far, are expected to flag sometime in the second half of this year. Due to the impact of interest rate hikes, carried out four times last year, lending rates have risen, while shadows have begun to appear in residential investment and auto sales as well.


Speculation that the U.S. economy will weaken in the months ahead runs strong. There is the possibility that the structure of the United States being the sole powerful economy — the driving force for global economic growth — may come to a turning point this year.


The closest attention must be paid should such uncertainties grow.


The focal point is the policy management of the U.S. Federal Reserve Board. The Fed is expected to raise interest rates twice this year, but there is also strong criticism against such a scenario, with the argument being it would cool the overall economy. Interest rate hikes are also feared to lead to an exodus of funds from emerging economies into the United States, bringing about large devaluations of those countries’ currencies and price hikes there.


It is appropriate that Federal Reserve Chairman Jerome Powell said Friday that the Fed will be flexible in shifting its stance on monetary policy this year. He should make efforts to continue transmitting information thoroughly.


Steer clear of trade war


Volatile economic situations in emerging nations have caused a number of financial crises in the past. The Fed should also keep watch over possible side effects of the interest rate hike and prudently implement its policy.


Trade frictions triggered by the United States will also be major causes for concern for the global economy this year.


Washington and Beijing will put their bilateral talks into full swing this month. If the negotiations do not make progress, the United States said it would raise the punitive tariff rates against China, starting in March.


It is doubtful that the two countries, which are vying fiercely over supremacy on both economic and military fronts, can make mutual concessions in a short period of time.


The conflict between the two economic powers will dampen the corporate and market psychology worldwide while also leaving trade and production stagnant. Their reciprocal imposition of high tariffs will increase import prices and reduce investment in both countries.


The U.S. administration must take more seriously the risk of the conflict adversely affecting consumers and corporations domestically. It should restrain itself from taking actions that ignore international rules, such as by imposing unilateral sanctions.


There are problems with China as well. The country needs to rectify its unfair conduct, such as violating intellectual property rights and providing massive amounts of subsidies for state-owned enterprises.


It is also worrying that China’s growth is slowing due to the trade friction among other factors. Its consumption and investment are declining while its growth rate stands around the mid-6 percent range, marking the lowest growth rate in 9½ years.


In recent years, the Chinese government has continued to promote such reforms as curtailing its public works spending and reducing corporate debt so it can achieve a soft landing to shift from rapid to stable growth.


However, it is now shifting its core policy back to such economic stimulus measures as infrastructure investment and monetary easing.


China has every reason to shift its policy in response to a slowdown in its growth. However, the ratio of the outstanding debt owed by China’s private sector to the country’s gross domestic product has exceeded the level reached by Japan during the days of its bubble economy.


China must turn its gaze to the risk of the debt further expanding due to its infrastructure investment and monetary easing.


Can China avoid trap?


Some have said that China could fall into the “middle income trap” — a situation in which a developing nation that became a middle-income one by taking advantage of low wages to achieve high growth will gradually stagnate as its personnel costs increase.


If China is caught in this trap, it means a loss of a driving force for the world economy that can compare with the United States. It is indispensable for the country to continue structural reforms that can boost its growth potential and productivity.


Necessary steps include further review of exclusive financial regulations to attract foreign capital. Another measure is to develop service industries for which there are potentially high needs, thereby stimulating consumption. These steps should be steadily carried out.


Another cause for concern is that the European economy is increasingly prone to downside risks. There are concerns that the economy there could decline due to the aggravation from problems such as Britain leaving the European Union and political instability in France.


It is important for various nations to take concerted actions in the effort to accelerate fiscal reconstruction and the disposal of nonperforming loans, thereby reinforcing their foundations for growth.


The European Central Bank is considering a plan to raise interest rates this autumn.


If the economy takes a downturn because of an overly hasty attempt to normalize monetary policies, everything will come to naught. It is important to carefully analyze economic trends and make appropriate policy judgments.

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