Is global economy facing a deeper problem than trade war?

January 15, 2019 16:35
Tycoon Li Ka-shing has urged the public to be cautious, saying the economic environment could prove far more challenging compared to recent years. Photo: Reuters

Hong Kong's richest man Li Ka-shing warned last Friday that the "global economy will deteriorate this year, and GDP growth is likely to be subdued all over the world."

The business tycoon urged the public to be cautious, saying the economic environment could prove far more challenging compared to recent years.

Is trade war the main reason for the grim prediction, or is there something else bigger and deeper?

Li’s business empire CK Hutchison covers diverse activities including container terminals, energy, retail and telecommunications, and is spread across 52 countries and regions. Given this, the broad global economic picture Li can get may sometimes be more comprehensive and precise than what the government of a single country gets to see.

The fact that Li is issuing an unusual warning this time, it indicates that the economic challenges that lie ahead could be rather daunting.

One needs to only look at recent data to realize the danger signals. 

China’s total exports and imports dropped by 4.4 percent and 7.6 percent in December year on year, according to data from General Administration of Customs released on Monday.

It marks the biggest decline since December 2016. Also, the manufacturing activity indicator PMI dipped to 49.4 in December, while PPI only edged up by 0.9 percent last month.

In fact, both the International Monetary Fund and the World Bank have revised down global growth forecasts this year to 3.7 percent and 2.9 percent respectively. China, US, Europe and other major economies are all expected to grapple with economic slowdown this year.

Nevertheless, it’s not that worrying if the root cause is US-China trade war. Global supply chain may restructure if the trade talks fall apart, and the growth momentum may just shift away from China to other emerging economies. That way, global economy may be able to sustain growth trajectory after a temporary pause.

But there could be deeper problems, such as the failure of the existing income distribution mechanism, as manifested by the Brexit vote, or the yellow vests movement in France that calls for economic justice.

If that is the case, global economic growth may struggle to pick up even if US-China trade talks result in a deal. The problem may linger for years, posing great threat to not only investment markets but social and political stability as well.

Still, there are reasons to be stay optimistic. China’s 1.4-billion-strong population is becoming better-off, and the people have strong desire to improve their life quality. Also, emerging economies like India, Indonesia and Vietnam can provide immense low-cost labor and continue to supply cheap goods for the world.

This article appeared in the Hong Kong Economic Journal on Jan 15

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist