Quo vadis, global economy?

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Prof. Ing. Peter Baláž, PhD.
EUBA
Bratislava, Slovakia

World economy under the pressure of globalization confirms ample changes in its performance. Its interdependence on economic development in China kept growing, not only in export-import flows of goods and services, but also quite importantly in commodity markets. Global economy was not ready for changes in demand, mainly for energy inputs, which have consequently been reflected in current prices and delivery terms, as well as in territorial flows on international markets.

International markets development in this millennium has been more and more under the influence of the growth of Chinese economy. China became the largest global exporter of goods in 2009 and beat the United States in the overall volume of aggregate income created (GDP in purchasing power parity) in 2015. This process of inversion in the positions of the United States and China respectively was accompanied by a similar trend in inflows and outflows of foreign direct investments (FDI) where China with its satellites Hong Kong, Singapore and Taiwan (so called Greater China) became dominant, too. However, territorial FDI direction was different from its main export-import flows.

FDI inflow, namely from multi-national corporations, was using mostly the cheap workforce, but after 2010 production and export of goods with higher added value were quickly taking over. Chinese investments export had a strategically different direction. In 2000 China was still the net exporter of crude oil and coal, for example, and exported electric power. But steeply growing production demanded more and more supplies of these and other raw materials.

Europan coal prices development

Therefore Chinese national companies expanded into Angola, Tanzania, Sudan, Venezuela, Columbia, Brazil and other countries with the aim of acquiring new mining capacities to cover growing domestic demand. China’s demand in the last decade drained half of global export of coal, iron and steel. On top of that, China quickly became the largest global consumer of copper, aluminium, zinc, coltan, gold and silver. Boom in import of oil and energy commodities caused euphoria on commodity exchanges. This development in the end increased the demand for mining and transport equipment which activated other sectors and productions through building and transport infrastructure projects. Consequently, China started to move resources to acquire new technology, know-how and advanced production companies, since 2014 mainly in the European Union. This cycle increased the E.U. countries dependency on Chinese economic growth.

Since 2011 it seemed that the United States and the European Union have adapted to the international financial crisis consequences and successfully renewed their economic progress. Supposedly, this was spurred by Chinese economy where the growth speed slowed down only a little after the crisis; its results in foreign trade and domestic consumption increase presented new hope for European and American exporters. What became apparent in 2014 already was, that the whole renewal process proved fragile and risky.

At first the U.S. FED, followed by the unitary ECB supported positive growth tempo by quantitative easing and pouring billions of dollars into its economies. This brought a certain economic stabilisation, as was shown in 2105, but cyclical risks remain. Surprisingly, China continues to be the factor that tips the scales. Downturn in its growth, as a natural effect after the end of industrialisation period, and following changes in domestic consumption were reflected in a decline in demand on international commodities markets. This caused a plunge, for example, in the price of coking coal – from approximately $ 200 to under $ 50 per metric ton – literally a catastrophe for its biggest exporters. It was the only reason for lower GDP in Australia and Indonesia, by 2% and 1 % respectively, in 2015. In the 1st half of 2014, coal import from the United States dropped by 60 %, from Canada by 46 % and from Russia by 26 % (Reuter). This trend profoundly impacted steel trade, for example, as well as other segments of global economy. Increase in steel products export to the European Union and the United States, where China exploited low domestic cost of labor, energies and coke, caused panic on both sides of the Atlantic.

Announced charges of dumping from European steel producers (Eurofer) might bring partially positive outcome, but China can consequently limit barter import of goods and services. Whole process creates a vicious circle. Although it undoubtedly lies in the Chinese economy, the situation seems to confirm that it will be the European Union who would suffer for not using the stabilisation period in global economy for structural transformation and fundamental economic reform which could renew its international competitiveness.

 

 



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