January 1, 2019 – Five questions about the international economic outlook, from Chosun Ilbo (the leading Korean newspaper), and my replies:
- US president Trump and China’s president Xi agreed to a temporary ceasefire, in which the US suspended to impose higher tariffs on Chinese imports next year. How do you see the Trade War is going? How would it affect the global economy next year?
The trade war is not going well, for either the United States or its trading partners. It is good that President Trump, in his December 1 dinner meeting with President Xi in Buenos Aires, decided he would stop making things worse for the moment. But the substantive outcome, at best, was that Trump postponed by 90 days the decision to raise to 25% his 10% tariffs on $200 billion of Chinese goods (and with it the expected Chinese retaliation). On March 1 we will be back where we were. The US side said the intervening time is to be spent negotiating to get China to accept its demands, including fundamental structural changes in its economic system. They will not agree to that. China’s public statement after the Buenos Aires meeting bore very little resemblance to the US description, even regarding the items on the agenda.
Trump’s trade war is slowing down global trade in general. This will in turn contribute somewhat to the slowing of global economic growth in 2019.
- US interest rates are climbing towards neutral for growth and inflation. How many times, do you predict, the Fed will raise the interest rates next year? How will the rates hikes impact on the global economy?
Prediction is hard. Fed policy will depend on economic developments (“data dependence”). Absent unexpected events, I would guess there will be two more interest rate hikes in 2019.
The Fed raised its policy rate to 2 ¼ – 2 ½ % on December 19. But the interest rate is still barely above the inflation rate, even though unemployment is down to 3.7 per cent (a 49-year low). This is well below the interest rate that the Taylor Rule, for example, would call for. Counter-cyclical policy calls for some further increases, even though that may not be a popular view.
Of course in any period when the US is raising interest rates there is the possibility that global investors will respond by pulling out of emerging markets. But if the Fed does continue its recent trend of raising interest rates it will be because US economic growth remains relatively strong, in which case it is not bad news for the world economy overall.
2-1. The US economy has been a world-growth engine this year. However, there are concerns whether its growth could be sustainable next year or not. What is your view on US economy for the coming year?
It is very likely that US growth will be slower in 2019 than it was in 2018. The number one reason the US economic expansion was so strong this past year was artificial fiscal stimulus – such large tax cuts and increases in government spending as to produce budget deficits of a size that is very unusual when unemployment is so low. It is especially unusual so late in an expansion. But this “sugar high” (to follow the universal adoption of the phrase of Larry Summers) is expected to diminish in the coming year. Moreover, other dysfunctionalities of life under the Trump presidency may also start to have serious economic costs, such as the misguided trade war and government shutdowns or debt-ceiling stand-offs.
- China’s annual economic growth is slowing down for the past years. What is your view on Chinese economy? How do you think will it influence global economy next year?
It was probably inevitable that the Chinese economy would slow down after 2010, relative to the historic preceding three decades of growth averaging 10 per cent. The question remains: hard landing versus soft?
Many of the appropriate reforms had been identified by 2013 (at the Third Plenum of the 28th Party Congress): financial liberalization; structural shifts away from manufacturing toward services, and away from exports and heavy investment toward consumption; environmental clean-up; land reform and hukou reform; and a reduction in the role of inefficient state-owned enterprises, thereby giving dynamic private firms more room to grow.
While some of these reforms have begun over the last five years, others have not. In particular the trend seems now to be toward increasing the role of the state rather than shrinking it. The bad loan problem may eventually produce the feared hard landing.
- What would be the most dangerous risk in global economy next year? US interest rates hike, China’s hard landing, Protectionism, Instability in emerging markets or anything else?
Protectionism and more general undermining of the liberal rules-based order are very serious threats for the long-term, but are unlikely to cause a recession in the short term. The “euro crisis” is not really over, but will continue indefinitely; Italy is of particular concern. The 2018 crises in Argentina and Turkey were and are serious; but financial markets seem better able to distinguish among EM countries now than in the 1990s. Some EMs, especially those with dollar debts, are more vulnerable than others.
March 2019 is not only the deadline for a resumption of the US-China trade war. It is also the month when Brexit is to go into effect. Brexit will be an economic negative, especially if it takes place without alternative arrangements for UK-EU trade, as now seems very possible. Such trade shocks are supply shocks, which monetary policy cannot protect against.
The possibility of a hard landing in China must rank as one of the top risks, especially from the standpoint of the Korean economy.
- Could Korea, an export leaning country, survive this environment? What kind of strategies should Korea take for the growth?
Two points. First, the Korean economy remains excessively dependent on exports as a source of growth. Second, government measures to raise the minimum wage and cut the length of the workweek, however well-intentioned, are not the way to promote employment and income. Labor markets should be flexible.
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