This paper provides a brief summary of the future economic outlook for the global economy, focusing on performance trends of different countries. It discusses macro variables such as GDP growth, inflation, and labor market outlook, and explores policy challenges for advanced and emerging market economies.
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Running head: BUSINESS ECONOMICS Business Economics Name of the Student Name of the University Course ID
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1BUSINESS ECONOMICS Table of Contents Introduction................................................................................................................................2 Discussion of macro variables...................................................................................................2 GDP growth...........................................................................................................................3 Inflation..................................................................................................................................4 Labor market outlook.............................................................................................................5 Policy Challenges.......................................................................................................................6 Policies for advanced countries..............................................................................................6 Policies in emerging market and developing economies.......................................................7 Conclusion..................................................................................................................................9 Reference list............................................................................................................................11
2BUSINESS ECONOMICS Introduction The paper aims to provide a brief summary of future economic outlook for the global economy for the coming years. In determining performance outlook for the global economy, focus should be given on identifying performance trend of countries belonging to different groups. There is an overall gloomy outlook of the global economy. Global economic activities are on a moderating trend. Along with this, the accumulated risks have darkened future economic prospects. Cross border, investment and international trade have softened resultinginasloweconomicgrowth.Theemerginganddevelopingeconomiesare undergoingseveralfinancialpressure.Underthiscircumstances,theemergingand developing countries lost momentum of economic growth. The recovery of commodity exports has also taken place at a slower than expected rate. Contraction of both import and export have resulted in a contraction of overall trade. Disorderly developments in the financial market have disrupted economic activity of the affected nations (worldbank.org 2019). This has a contagion effect on related economies. The disputes related to trade among different nations could be escalated or spread more widely resulting in a negative spill over on global economy. All these issues need to be resolved with the aid of appropriate policy tool. Immediate policies are to be taken by the policymakers in emerging and developing economies to reduce the stress in the financial markets, rebuild the macroeconomic policy perspective, and manage the consequences of debt dynamic along with a sustained low inflation. Global Macroeconomic outlook report is prepared taking into consideration the current state of the global economy and projection has been made for near future. Discussion of macro variables Evaluation of economic performance needs evaluation of performance trend of different macroeconomic variable. In this connection, three major macroeconomic variables
3BUSINESS ECONOMICS that need to be considered are GDP growth, inflation and unemployment. Gross Domestic Product is regarded as a composite measure of determining values of all the produced goods and services in a nation (Gottheil 2013). Growth in GDP is the percentage change of aggregate output from one year to another. Rate of growth in GDP is considered as a measure of economic growth of a nation. Rate of inflation is a measure used for capturing movement of price level in a nation. The variable unemployment indicates labor market performance of the economy. Policymakers generally aim to ensure a steady long run growth along with a low inflation and low unemployment (Case, Fair and Oster 2014). Apart from these three, other important macroeconomic variables are exchange rate, interest rate and others. GDP growth Evidences from the past few years have revealed a weak expansion of global economic activity. In October 2018, the global growth was estimated to be 3.7 percent. Despite weak performances in some economies especially in Europe and Asia, there is average growth of 3.7 percent for the global economy. The projected growth rate for global economy in 2019 and 2020 are 3.5 percent and 3.6 percent respectively. The projected growth rate below the growth expectation in October 2018. In response to growing trade tensions between China and United State, there is a downward revision of projected economic growth in the two consecutive year of 2019 and 2020 (imf.org 2019).Tariff imposed by United State and associated retaliation by China triggered a trade war between the two nation having an adverse trade effect across the globe. Since the second quarter of 2018, there is a soft momentum in global economic growth. The trend has been followed in Germany due to implementation fuel emission standard for automobiles (Michelsen et al. 2018). It Italy, gloomy outlook of economic growth has been developed due to accumulation of sovereign and financial risk that have weighted out domestic demand. This has also
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4BUSINESS ECONOMICS weakened the sentiments of the financial market as well as a contraction of economy of Turkey at a much deeper extent than that anticipated. Despite continuous expansion of global economy, recoded slow economic growth in the third quarter of the 2018 has disappointed some of the economies. The weak economic growth recorded in the third quarter of 2018 is expected to continue in the coming years. Economic growth in the developed countries is expected to slow from 2.3 percent in 2018 to 2.0 percent in 2019 and to 1.7 percent in 2020. The downward revision in growth is mostly contributed from a downward revision of growth in the Eurozone (Belke, Dreger and Dubova 2019). Economic growth in the Eurozone has projected to slow down from 1.8 percent in 2018 to 1.6 percent in 2019. Economic growth has declined to a remarkably low level for many of the advanced economies such as Italy, Germany and France. There is large uncertainty regarding the growth performance of United Kingdom in the upcoming years derived from prolonged uncertainty associated with Brexit. Outlook for economic growth of United State has remained unchanged. Growth is expected to lower to 2.5 percent in 2019. The slowdown will continue in 2020 with a projected growth rate of 2019 (oecd.org 2019). Economic growth in emerging and developing economies are expected to decline from 4.6 percent in 2018 to 4.5 percent in 2019. Inflation In the global market, commodity prices are projected to constitute a stable trend. Since the third quarter of 2018, there has been a notable fluctuation in the energy prices. The price fluctuations are largely explained by the supply side factors. There is a sharp decline in metal prices along with a small decline in prices of agricultural commodity. Oil prices in 2018 increased by 30 percent following a significant increase in consumption of oil. Increase in Brent crude oil price had resulted from a decline in production of oil in Venezuela and
5BUSINESS ECONOMICS concern regarding the effect of US sanction on Iran. Price however sharply declined in November. In 2019, oil prices are estimated to average at $67 per barrel (un.org 2019). Growth in crude oil demand is expected to continue in future. However, lose in momentum in emerging and developing economies may have a larger impact on the oil demand. In 2018, metal price have increased on an average by 6 percent. The imposition of tariff by United State on China’s import lowered metal prices in the second half of 2018. Price of agricultural commoditiesremainedlargelystablethroughout2018.Thedevelopmentofvarious commodities resulted in a decline in the prices for agricultural commodities. Prices of Soybean in United State fell sharply after China’s announcement of tariff imposition on imported Soybean from United State. As against this, price was relatively higher in some countries especially in Brazil. Consumer Price Inflation has remained almost stable in advanced economies except United State where price level has been slightly increased. There is an easing inflationary pressure in emerging and developing economies resulted from a decline in oil price. For some economies, the easing inflationary impact has been offset by currency depreciation leading to an increase in domestic prices. Labor market outlook In advanced economies, the condition of labor market is likely to be tightened despite a slow growth of jobs. This may increase wage but cause problem for several businesses searching to fill shortage of talents. In 2019, unemployment rate is expected to decline a little in Germany and United State. Job creation in these two nations have remained strong. However, many other economies might show evidences of hitting a strong structural floor. Canada has already experienced this trend. Unemployment in Canada recorded to be 5.8 percent during 2017 with no further decline in latter period. This has triggered a wage growth in the nation (worldbank.org 2019). The economies like Belgium, Netherlands and Denmark are reaching to the respective floor. There is sharp fall in pace of decline in joblessness. The
6BUSINESS ECONOMICS occurrence of Brexit in an orderly manner may keep the unemployment rate in United Kingdom at a stale level. However, Brexit also involves possibility of disorderly deal, which will result in a rise in unemployment. Policy Challenges Government in different countries uses a set of macroeconomic policies to stabilize growth along with a low price level and low unemployment. Two primary macroeconomic policies used by government are fiscal and monetary policy (Mankiw 2014). Government implements particular policy tools depending on actual state of the economy. The policy challenges in advanced countries however differ from the emerging and developing nations. Policies for advanced countries Monetarypolicyisrelativelylesseffectiveinadvancedeconomies.Thisis particularly true for United State where tightening is spreading more rapidly compared to elsewhere because of pro-cyclical fiscal policy easing. The developed countries should use the period of economic growth beyond the expected growth rate for the purpose of creating room to fight future shocks of economic cycle (Ehnts 2016). Long term growth prospects for the advanced countries remain subdued. The situation can be further worsened by the shift in immigration and trade policies. Monetary and financial policies The Federal Reserve in United State has now attempted to remove monetary policy stimulus because of new inflationary target, low unemployment amid stimulus coming from pro-cyclical fiscal policy. In contrast to this, the European Central Bank and Bank of Japan have revealed that they will keep the policy rate fixed in the near future. The policy rate in United State for the first time reaching towards zero (Jarocinski and Karadi 2018). The policy rate however is expected to reach to a peak level of 3 percent indicating less room to the
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7BUSINESS ECONOMICS Federal Reserve to cut the interest rate before moving towards the lower bound. Federal Reserve lowered the policy rates by 5 percent in the last three downturns. Central banks in other advanced countries are now left with even lesser space for monetary policy stimulus. There are possibilities of deployment of unconventional monetary policies (Kharusi and Ada 2018). The lack of space for monetary policy reflect the need for alternative policies during economic downturn. Fiscal policy In most of the advanced nations, government is now relying on fiscal policy stimulus. The reliance on fiscal policy in the form of rising government expenditure resulted in a significant increase in debt to GDP ratio. In total debt of these nations, government debt accounts the largest share. This constraints capacity of government to undertake counter cyclical fiscal policy during economic slowdown (Coibion, Gorodnichenko and Weber 2019). United State has introduced considerable fiscal stimulus despite a state of all most full employment in the economy. The fiscal stimulus is projected to increase fiscal deficit by 5 percent(GalindoandPanizza2018).Thepro-cyclicalfiscalpolicythoughstimulates economic growth but at the cost of rising inflationary pressure, increase in domestic interest rate, crowding out of activities in the private sector along with widening current account deficit in United State. Policies in emerging market and developing economies Current state of global financial market suggests that EMDEs requires to increase their strength of buffer stocks against the persisting risk arising from unfavorable condition of financialmarket.Inthesenations,thefiscalpositionhasremainedrelativelyfragile underestimating the need for improving domestic revenue maximization or conducting any fiscal policy reform to improve current economic state (Argy 2013). In the long run,
8BUSINESS ECONOMICS structuralpoliciessuchasenhancinghumancapital,encouragingregionaleconomic integration, lowering barriers to investment for different small and medium sized enterprises have the potential to improve economic growth and fight economic challenges. Monetary and financial policies The emerging market and developing economies are facing considerable policy challenges due to pressure in the global financial market associated with capital outflows and associated currency depreciation. The severe pressure in financial and currency markets in some of the EMDEs (such as Argentina, Turkey) has resulted in policy tightening in these nations. In general, monetary policy now has become less accommodative in these nations so that it can face severe currency depreciation or can use the complete reserve stem from it (Dell'Ariccia, Rabanal and Sandri 2018). Weaker domestic currency now has pushed inflation up in many EMDEs. This is more prevalent in countries that are major commodity exporters in the global market (Argentina, Brazil, South Africa). The inflationary pressure among commodityexportersshowncyclicalpositionofthesenations.Themonetarypolicy normalization in the advanced countries will pose considerable challenge for EMDEs. The tightening policy cycles in United State has a spillover effect on EMDEs through the channel of foreign credit availability. The challenges are larger for countries having greater external vulnerabilities such as imbalances in current account, high external debt, high inflation, weak foreign exchange reserve and others (Neri and Siviero 2018). The policymakers in EMDEs need to keep a credible commitment towards medium term price stability as supported by their respective macroeconomic framework. Fiscal policy In EMDEs the position of government is in a fragile state deteriorating the dynamics of government debt and limiting fiscal space. In many countries, needed reform to improve
9BUSINESS ECONOMICS condition of fiscal positions are either halted or not implemented fully. Funding new spending puts additional constraint on the domestic revenue. The oil exporting countries continue to face challenges in terms of fiscal sustainability (Reifschneider and Tulip 2018). The recent volatility in global oil price indicates that these nations need to initiate deep reform that would bolster their non-resource budget. Retrieving policy buffer is one of the key priorities to effectively use countercyclical fiscal policy. Strategies to create more fiscal space include setting deficit targets by making credible medium term expenditure, initiating tax reforms, liabilities to better manage fiscal risk and domestic resource mobilization (Bova, Medas and Poghosyan 2018). To implement fiscal policy in an effective manner EMDEs should attempt to confront long term fiscal challenges derived from high informality as proposed fiscal initiatives may reduce revenue base by tax erosion in some regions. Conclusion The discussion so far made has suggested that global economic growth is moderating globally to gradual recovery of manufacturing activity and trade. Despite several trade negotiations there still remain some trade tensions. These trade tensions along with softening global prospects have hurt confidence on investors leading to a decline in equity prices. This ultimatelycreatesapressureinglobalfinancialmarket.Globaleconomicgrowthis forecasted to be decline from recorded growth in the last year. The advanced economies have removedmonetarypolicyaccommodationwithagradualslowdowninglobaltrade. Economic growth of the advanced countries is expected to be supported by pro-cyclical fiscal stimulus. The fiscal stimulus in the longer term will aggravate the problem of fiscal deficit in these nations. The economic growth in the advanced nations will move towards the potential growth rate to a further decline to 1.5 percent following normalization of monetary policy and binding capacity constraint. Gradual slowdown in global trade and pressure from financial market will pose challenges to future economic growth of emerging market and
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10BUSINESS ECONOMICS developing economies. The weaker than expected commodity export has stalled the growth rate in these economies. Growth in these countries is expected to decline continuously in the upcoming years. In contrast to advanced economies, monetary policy is more effective in emergingmarketanddevelopingeconomies.Thereislittlespaceforeffectively implementing fiscal policy. A number of fiscal policy reform is needed to successfully conduct fiscal policy in these countries.
11BUSINESS ECONOMICS Reference list Argy, V., 2013.International macroeconomics: theory and policy. Routledge. Belke, A., Dreger, C. and Dubova, I., 2019. On the exposure of the BRIC countries to global economic shocks.The World Economy,42(1), pp.122-142. Bova, E., Medas, P. and Poghosyan, T., 2018. Macroeconomic stability in resource-rich countries: The role of fiscal policy.Journal of Banking and Financial Economics, (1 (9)), pp.103-122. Case, K.E., Fair, R.C. and Oster, S.M., 2014.Principles of macroeconomics. Pearson. Coibion, O., Gorodnichenko, Y. and Weber, M., 2019.Monetary policy communications and their effects on household inflation expectations(No. w25482). National Bureau of Economic Research. Dell'Ariccia, G., Rabanal, P. and Sandri, D., 2018. Unconventional monetary policies in the Euro Area, Japan, and the United Kingdom.The Journal of Economic Perspectives,32(4), pp.147-172. Ehnts, D.H., 2016.Modern monetary theory and European macroeconomics. Routledge. Galindo, A.J. and Panizza, U., 2018. The cyclicality of international public sector borrowing in developing countries: Does the lender matter?.World Development,112, pp.119-135. Gottheil, F., 2013.Principles of macroeconomics. Nelson Education. imf.org2019.WorldEconomicOutlookUpdate,January2019:AWeakeningGlobal Expansion.[online]IMF.Availableat: https://www.imf.org/en/Publications/WEO/Issues/2019/01/11/weo-update-january-2019 [Accessed 28 Feb. 2019].
12BUSINESS ECONOMICS Jarocinski, M. and Karadi, P., 2018. The macroeconomic impact of news about policy and news about the economy in ECB announcements.Research Bulletin,50. Kharusi, S.A. and Ada, M.S., 2018. External debt and economic growth: the case of emerging economy.Journal of Economic Integration,33(1), pp.1141-1157. Mankiw, N.G., 2014.Principles of economics. Cengage Learning. Michelsen, C., Breuer, C., Bruns, M., Hanisch, M., Junker, S. and Schlaak, T., 2018. Growth rateofGermaneconomynormalizingafterprolongedeconomicboom.DIWWeekly Report,8(50/52), pp.510-513. Neri, S. and Siviero, S., 2018. The Non-Standard Monetary Policy Measures of the ECB: Motivations, Effectiveness and Risks.Credit and Capital Markets,51(4), pp.513-560. oecd.org 2019.OECD Economic Outlook and Interim Economic Outlook - OECD. [online] Oecd.org. Available at: http://www.oecd.org/eco/outlook/economic-outlook/ [Accessed 28 Feb. 2019]. Reifschneider, D. and Tulip, P., 2018. Gauging the uncertainty of the economic outlook using historicalforecastingerrors:TheFederalReserve’sapproach.InternationalJournalof Forecasting. un.org 2019.World Economic Situation & Prospects for 2019. [online] Development Policy & Analysis Division | Dept of Economic & Social Affairs | United Nations. Available at: https://www.un.org/development/desa/dpad/publication/world-economic-situation-and- prospects-2019/ [Accessed 28 Feb. 2019]. worldbank.org 2019.Darkening Prospects: Global Economy to Slow to 2.9 percent in 2019 asTrade,InvestmentWeaken.[online]WorldBank.Availableat: https://www.worldbank.org/en/news/press-release/2019/01/08/darkening-prospects-global-
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