Editor's note
International Internet Magazine. Baltic States news & analytics
Tuesday, 19.03.2024, 02:14
Global growth: effect for the Baltic States
Quite
symptomatic, that the new economic outlook for the next two years predicted
generally strong growth with some risks. After a
lengthy period of weak growth, the world economy is finally growing around 4%
per year, which is the historical average of the past few decades.
Good news
is even better knowing that such strong growth in the world economy is
supported by increased investments and accelerated global trade. The recovery
in investment is particularly good, since the fate of the current expansion is highly
dependent on investment performance.
However,
pick‑up in investment remains weaker than in the past: the same is true for
global trade, which is expected to grow at a “respectable rate”, unless it is
derailed by trade tensions.
However,
contrary to previous periods, 4% world growth is not due to rising productivity
gains or sweeping structural change: this time stronger economy is largely due
to monetary and fiscal policy support.
Monetary and fiscal policies
For many years,
monetary policy was the main driving force in growth: during the international
financial crisis, central banks cut interest rates aggressively, injected funds
into the economy and purchased assets at a record pace in an attempt to boost
the economy.
In contrast, in most countries, fiscal policy
remained prudent. Still, historically low interest rates provided an
opportunity for governments to use their available fiscal space to help foster
growth. Many OECD member states and governments
are now following this OECD’s advice. At first, the resources enabled by lower
interest payments were used by governments to avoid cutting expenditures or
raising taxes. With the improving economic situation, many governments have
started to undertake additional fiscal easing.
Now that monetary policy is finally starting to
return to normal, governments are stepping in to provide fiscal policy support.
It is a notable trend: fiscal policy is a dominant feature in states’ policies:
during 2018, the OECD countries are undertaking fiscal easing.
Numerous fiscal
stimulus in some countries is very significant, while it is less ambitious in
other countries; however, this fiscal easing will have important repercussions
for the world economy. In the short run, it will add to growth; though countries
experiencing longer expansions might find that this fiscal stimulus (where it
is large) will also add to inflationary pressures in the medium term. Only time
will tell if these short type gains might be offset by some medium term pain.
What matters is that, in making these choices, governments are fully aware of
the medium term impact of their policies, and do not focus only on the short‑term
benefits from fiscal stimulus, underlined OECD Acting Chief Economist, Álvaro
Santos Pereira.
Other structural trends
Presently
witnessed strong growth is also associated with robust job creation in many
economies. It is particularly satisfying to see that among OECD states,
unemployment is set to reach its lowest level since 1980, even though it
remains high in some countries. Thanks to this robust job creation and the
related intensifying labour shortages, a rise in real wages in many countries is
now projecting; this increase is still somewhat modest.
However, there
are clear signs that wages are finally on the way up. This is an important
development, since the global crisis had a severe impact on household incomes,
particularly for the unskilled and low‑income workers.
In spite of all this good news, risks loom large
for the global outlook. The risks are mainly dealt with, first and foremost, with
an escalation of trade tensions among some states. It is worth remembering
that, in part, the rise in trade restrictions is nothing new. After all, more
than 1200 new trade restrictions have been implemented by G-20 countries since
the outset of the global financial crisis in 2007-08. Still, since the world
economy is much more integrated and linked today than in the past, a further
escalation of trade tensions might significantly affect the economic expansion
and disrupt vital global value chains.
Another important risk going forward is related to
the rise in oil prices. Oil prices have risen by close to 50% over the past
year. Persistently higher oil prices will push up inflationary pressures and
will aggravate external imbalances in many countries.
In the past few years, very low interest rates
have encouraged borrowing by households and corporations in some countries and
led to overvaluation of assets (e.g. houses, equities) in many others. In this
context, rising interest rates might be challenging for highly indebted
countries, families and corporations. Of course, this rise in interest rates
has been widely anticipated and should thus not cause any major disruptions.
Nevertheless, if inflation rises more than expected and central banks are
forced to raise rates at a faster pace, it is likely that market sentiment
could shift abruptly, leading to a sudden correction in asset prices.
A swifter rise in interest rates in advanced
economies might also continue to lead to significant currency depreciation and
volatility in some emerging market economies that are highly reliant on
external financing and facing internal or external imbalances. Geopolitical
tensions might also contribute to sudden market corrections or a further rise
in oil prices. Brexit and policy uncertainty in Italy could add pressures to
the expansion in the euro area.
Effect for states’ political economy
Since private and
public debt remain high in some countries, improving productivity, decreasing
debt levels and building fiscal buffers are important in strengthening the
resilience of states’ economies. As monetary and fiscal policies are not going to
sustain the expansion forever and might even contribute to financial risks, it
is absolutely essential that structural reforms become a priority. In the past
couple of years, few countries have undertaken substantial structural reforms.
Most of the countries that reformed are in the emerging economies, e.g. in Argentina,
Brazil and India. In the advanced economies, important labour reforms were
introduced in France and a sweeping tax reform was implemented in the United
States. However, the OECD-2018 “Going for Growth” report points out, these
important exceptions do not counter the rule that reform efforts have been
lagging.
Important is that the only way to sustain the
current expansion and making further growth work for all is to undertake reforms
aimed at enhancing productivity. As many OECD Education Policy Reviews and OECD
National Skills Strategies show, it is crucial to redesign curricula to develop
the cognitive, social and emotional skills that enable success at work, and to
improve teaching quality and the resources necessary to deliver those skills
effectively.
In many
countries, investment in quality early childhood education and vocational
education and apprenticeships are of particular importance. Attention to skills
in the labour market reforms is also crucial. Reforms to boost competition,
improve insolvency regimes, reduce barriers to entry in services and cut red
tape are also making states’ economies more dynamic, more inclusive and more
entrepreneurial. Investment in digital infrastructure will also be essential in
this digital age. In addition, there are significant opportunities to reduce
trade costs in both goods and, in particular, services, boosting growth and
jobs across the world.
Additional reference sources:
On the OECD economic outlook: https://www.oecd-ilibrary.org/economics/oecd-economic-outlook-volume-2018-issue-1_eco_outlook-v2018-1-en
On main global economic indicators: https://read.oecd-ilibrary.org/economics/main-economic-indicators/volume-2018/issue-10_mei-v2018-10-en#page1
On Latvian
economic development statistics: https://read.oecd-ilibrary.org/economics/oecd-economic-outlook-volume-2018-issue-1_eco_outlook-v2018-1-en#page184
In spite of
stronger growth, there is no time for complacency. Structural reforms are vital
to sustain the current expansion while mitigating risks. Therefore, at the
modern stage in the world economy, it is truly crucial to provide for expensive
structural reforms. After monetary and fiscal policies have been implemented,
it is time for reforms to sustain the expansion, to improve well‑being, and to
make growth work for all. The World Bank Group Report-2018 includes special chapters
on international trade and financial integration as well as on each country’s
statistical index. See:
World Bank Group Report on Latvian economy and business in: www.doingbusiness.org
General reference:
https://www.oecd-ilibrary.org/sites/97a8d82a-en/index.html?itemId=/content/component/97a8d82a-en