In his presentation during the economic session of the 51st annual meeting of worldsteel (World Steel Association) held in Brussels on October 16-17, Roger Bootle, chairman of Capital Economics, spoke on the topic of the global recovery and the major risks it faces. Stating that the world economy has been continuing its recovery, he said that China has stabilized for now, the US and UK remain robust, hard-hit Russia and Brazil have stabilized, many emerging markets are recovering, while in the current year the euro-zone is expected to show decent growth. This picture shows a gradual recovery from the crisis, also helped along by lower oil prices, and another positive factor is that fiscal austerity is also coming to an end. However, he pointed out the enormous difference in growth rates between developed countries and emerging economies where GDP growth rates have surged rapidly in comparison.
Looking at the risks to the global recovery, the Capital Economics chairman pointed to three areas: China, the euro zone and the world financial and banking system. He described the financial system in China as “rickety”, saying that it is vulnerable to shocks. He also stated that one has to be wary of the official statistics coming from China. No economist, he commented, believes the official GDP figures coming from China, adding that, in his estimate, the real Chinese GDP figure is set to fall to four percent in the coming year. It is no longer easy for China to grow, he added, going on to stress that, unless China undertakes fundamental reform, its sustainable growth rate will eventually drop down to two percent.
Turning to the euro zone, Mr. Bootle stated that massive differences in growth rates are observed in the zone, with Germany pushing ahead, with France somewhat behind it, while Spain and Portugal have started to recover in recent years, having been badly hit by the crisis. Italy’s growth is poor and it has in fact shown very poor growth since the introduction of the euro. Accordingly, Italy, he said, causes most concern due to its poor economic performance and also partly due to its political system. So while the euro zone overall is doing better now, he said there could be some upsets. On the financial system in the EU, he pointed out that the debt ratios in most European countries are high.
Thirdly, looking at the global financial system, he stated that policy-makers are facing a very difficult dilemma about when to raise interest rates. Should they continue to wait before inflation starts to rise and risk spiraling inflation and the appearance of bubbles in the economy? Or should they take action sooner rather than later and risk causing an economic slowdown?
Among other issues in the global economy, Bootle referred to the increased concerns about inequality and, in line with this, a rise in scepticism about the markets, and the resulting possibility of a return to more active government. He also mentioned the challenge from robotics and A.I.
Summing up his conclusions, Mr. Bootle stated the world recovery looks robust, though China is a medium-term worry, while there are concerns about the euro zone. The global financial system remains precarious, he said, and at some time inflation will surprise policy-makers. Political opposition to markets is a major worry, he added, while stressing that higher investment is needed to boost real incomes.