The world economy in the near future

Last week, the economic counsellor of the embassy of Spain, Pedro Pascual, briefed the members of the Spanish Chamber of Commerce on the prospects of the world economy from 2020 and beyond. We are headed for challenging times.

Global growth is seen to decelerate from 3.8% in 2018 to 3% in 2019 and further down to 2.7% (World Bank data) in 2020 due to several reasons, the most significant of which is the trade war waged by the US against China and the EU. The effect of these trade wars is a reduction in global trade from its normal growth rate of 3% to just 1% in the next two years.

Exacerbating matters are the political uncertainties that persists in every continent of the globe. From Brexit in Europe to the specter of a presidential impeachment in the US. From Hong Kong’s civil unrest to the Chilean riots in Latin America. All these dampen global investments which is seen to decrease by as much as 40%.

The United States will likely post a growth rate of 2.4% in 2019, decelerating to 2.1% in 2020. This is because the pump priming initiatives of 2017 tax cuts will lose their effect. While employment will remain stable, investments in new enterprises are seen to drop. Similarly, consumption is seen to soften as the tariff increases on Chinese products begin to translate to higher retail prices.

As for China, it too will slow down. From a likely growth rate of 6.1% in 2019, it is seen to decelerate to just 5.8% in 2020. Public construction will ease dramatically as the communist government reigns-in its massive debts.

The trade war’s effect on China has not been as significant as one may expect. This is because the Chinese economy is now transitioning from an export-lead economy to one that is consumption-lead. The slack in demand for Chinese goods abroad are off-set by a spike in local consumption. Hence, a rise in the production of consumer goods is foreseen while production of capital goods will drop.

As for the EU, growth is seen to be almost static, from 1.2% in 2019 to 1.4% in 2020. Among the bigger economies of the EU, Spain will post the fastest growth rate of 2.2% and 1.8%, this year and next. Germany will struggle with growth of only .05% in 2019 and 1.2% in 2020.

At the heart of the EU woes is the drop in the production of automobiles. The production of cars, trucks, and their supply chain of parts comprises the largest chunk of the EU’s industrial output. For the first time in a decade, demand for automobiles is seen to drop by 3% across the board due to the rise of ride sharing services and a shift in preference away from diesel and gasoline to electric vehicles.

The trade war will also affect the EU adversely, especially Spain whose biggest export destination outside the EU is the United States. Investments in new factories will decrease but consumption will remain steady.

Emerging markets, including the Philippines will continue to drive global growth. Among the larger economies in this category, India, the Philippines, Vietnam, and Indonesia will post growth rates of between five and seven percent in 2019 and 2020.

The Philippines is seen to grow by 5.7% in 2019 and 6.3% in 2020. The country is on track towards graduating to an upper-middle income economy early next year. Since consumption and government spending drives the economy, the effects of the trade war is minimal.

Economic indicators in the Philippines are stable. Inflation stood at 1.7% as of August; the current account deficit is forecast to reach 2.4% of GDP by year-end, a level that is still manageable; unemployment was at 5.4% as of July; and gross international reserves stand at $85.7 billion, equivalent to 7.5 months of imports. These numbers suggests that the economy is healthy.

But there are fundamental weaknesses too, the most serious of which is the drop in foreign direct investments (FDIs) by a massive 40%. This is due to many reasons, among them is the uncertainty in the tax environment due to CITIRA and the slower-than-expected roll-out of infrastructure projects (which has turned off many investors).

It must be stressed, however, that the negative list of industries where foreigners are precluded (or limited) from participation as prescribed by the 1987 constitution is still the biggest dampener in the country’s ability to attract FDIs. President Duterte has yet to fulfill his promise to amend the charter. Doing so will open the floodgates of FDIs.

Other weaknesses that government has been slow to resolve are the relatively low education and talent quotient of the workforce, relatively slow adoption to information and communication technologies, low innovation capability, corruption, bureaucratic red tape, and a lethargic, corrupt justice system.

These weaknesses, taken collectively, have eroded Philippine competitiveness.

As I have always said, foreign direct investments is the silver bullet that can make the Philippine’s growth story sit on solid ground. Even today, despite the economy’s growth of 6% or more, I worry that our growth is driven by public consumption and government spending. The former is fueled by OFW remittances while the latter is funded by debt. Foreign direct investments brings in capital, technologies, jobs, and export earnings. The FDI growth path is fundamentally more solid as it based on productivity.

As we move forward to the 2020s, the world will face new realities, said Mr. Pascual. Immigration will persist due to economic reasons, climate reasons (erosion of coastal areas and extreme weather changes), as well as for reasons of domestic conflict; robotics and automation will take over manual labor; modes of mobility will change away from private cars to public transportation, rider sharing, and bicycles; and innovative services will continue to disrupt brick and mortar businesses.

These changes will bring about massive disruption to industries, worldwide — but they will also bring forth many opportunities. The losers will be those who resist change and fail to adapt. But the winners will be those who evolve, innovate, and create.

Andrew J. Masigan is an economist.