Author: Marek Pielach

Journalist at Obserwator Finansowy

Dark clouds over the global economy but the outlook for Poland still sunny

PIELACH Ciemne chmury nad światową gospodarką w Polsce jeszcze słonecznie JAMNIK

The World Bank expects the global GDP to grow by 2.9 per cent in 2019, which means a slight moderation towards the long-term average. There are many downside risks to this forecast, including a slowdown in the United States and in China.

In the baseline scenario, the economy of the United States will grow by 2.5 per cent this year (compared with 2.9 per cent in the previous year), while China’s economy will expand by 6.2 per cent (following a growth rate of 6.5 per cent last year). The expected slowdown in the rate of growth in the United States is caused partially by the tightening the monetary policy by Fed and partially by the waning effect of the corporate tax cuts. The decrease in China’s growth rate is the result of weakening exports and, more broadly, the adjustment of country’s economic model from the role of „the world’s factory” towards an economy driven to a greater extent by internal consumption.

These forecasts were presented in the January 2019 edition of the World Bank’s „Global Economic Prospects” report published with the meaningful subtitle: „Darkening skies”. This year the rate of GDP growth is expected to reach 2 per cent in advanced economies and 4.2 per cent in the emerging and developing economies. The rate of global GDP growth will reach 2.9 per cent (growth of 3 per cent was predicted in the previous edition). Meanwhile, the forecast for Poland is pretty good, with the rate of GDP growth projected to reach 4 per cent in 2019.

On the one hand, the World Bank points out that the slight downward revision from the previous forecasts merely constitutes a return to the long-term average, and that the growth rate in many countries is still above potential. On the other hand, the list of downside risks is significant.

The two largest economies in the world are currently maintaining a fragile ceasefire in their trade war. In 2018, the administration of President Donald Trump raised tariffs for products worth approximately USD300bn, most of which were imported from China. In total, they accounted for about 12 per cent of the goods imported to the United States. Together with the retaliatory tariffs announced by the trade partners, the overall value of new tariffs amounted to USD430bn, or 2.5 per cent of the global trade. Moreover, there is no guarantee that the trade dispute is over. If all the tariffs currently under consideration were implemented, they would affect about 5 per cent of global trade flows.

The economists at the World Bank have even calculated that if all WTO members were to increase their tariffs to the legally-allowed maximum rates this could translate into a decline in global trade flows of about 9 per cent, which is similar to the decrease seen during the global financial crisis in the years 2008-09. While this is obviously not the baseline scenario, these figures show the potential consequences of the trade wars.

The report also presents a hypothetical scenario in which the projected growth is 1 percentage point below the baseline in the United States, in China, and in both of these countries at the same time. The last variant is obviously the most dangerous one. If the rate of growth in both the United States and China was 1 percentage point lower than the baseline forecast for 2019, then the global GDP growth in 2020 would also be 1 percentage point lower. From such levels it’s pretty close to a global recession.

The likelihood of a recession in the United States has been growing since the beginning of 2014, but it is still relatively low. The probability that GDP growth in the United States will be below zero in the next 12 months is around 15 per cent. There is a 60 per cent probability that a possible recession in the United States would translate into a slowdown in global growth, and a 50 per cent probability that it would even cause a global recession.

The World Bank also points out that the current expansion in the United States has already been the longest in history, and that over the past two decades the monetary policy has been accommodative in many countries. At the same time, there has been a rapid increase in the level of indebtedness, which could set the limits for future fiscal policy. In 2008, the global debt accounted for approximately 200 per cent of the global GDP, while just a decade later this ratio is approaching 250 per cent. The largest increase in debt was recorded in the group of emerging market and developing economies, which also includes China. Government debt in developed economies could also constitute a challenge.

The authors of the report indicate, that „in many advanced economies, government debt-to-GDP ratios have reached unprecedented levels, with government debt becoming the largest component of total debt. They warn, that „this limits the capacity of countries to provide counter-cyclical fiscal stimulus in response to economic slowdowns”.

However, the factors that threaten the development of many economies do not necessarily have to harm GDP growth in Poland. The experts agreed, that the dark clouds are still far away from our country. Ernest Pytlarczyk, the chief economist at mBank, believes that this year Poland should simply expect the normalization of growth, as the last year’s GDP growth exceeding 5 per cent was clearly above potential. This result was achieved without any external and internal imbalances. There are no speculative bubbles, even in the real estate market, and the investment cycle was not overly expansionary. “Our forecast for GDP growth in 2019 is 3.5 per cent. At the same time, there is a possibility of fiscal expansion, and we can still rely on domestic demand,” said Mr. Pytlarczyk.

“We have macroeconomic stability, which is the condition for productivity growth. We have really high growth and low inflation. This growth is well balanced,” believes Piotr Szpunar, the director of the Economic Analyses Department of Poland’s central bank, NBP. In his opinion, outside of increased productivity, further sources of growth can be found in improved education, which could compensate for the deteriorating demographics. A well-thought-out immigration policy, open to highly qualified foreigners, could play an equally important role. The third untapped source of growth opportunities is the diversification of our exports towards regions of the world that are developing at a faster than the European Union.

The World Bank also points out that in the medium and long term we may face one more surprising challenge — rising inflation. The authors conclude, that „maintaining low inflation can be as great a challenge as achieving low inflation”. Low inflation is now seen as a permanent achievement. Emerging market and developing economies have seen inflation fall from 17.3 per cent in 1974 to about 3.5 per cent in 2018. However, a longer time perspective shows, that since 1900, after long periods of low inflation, there were at least three instances of sharply rising inflation which followed periods of relative calm.

The economists at the World Bank warn, that „if the cyclical and structural forces become less disinflationary over the next decade than they have been over the past five decades, inflation could rise globally”. Moreover, „through the strengthening global inflation cycle, this may put upward pressure on inflation in emerging market and developing economies”.