GED Under the Radar – June Edition

Every month there are some economic stories that fall through the cracks. In this segment,  the GED Team will present to you those economic stories, which we found most interesting each month but felt received less popular media attention than they actually deserved. These stories can come from all over the world. They can be relevant and important for the global economic system as a whole or just affect a select group of few, they can be serious or they can be humorous. In any case they will be interesting. This is “GED Under the Radar”!

June’s Radar Stories in Short:

• Is China’s debt fuelled growth path sustainable?
  
• Has Globalization Reached its Peak?
  
• Pricing a national treasure – Is the Great Barrier Reef “too big to fail”?

Can China keep accumulating debt to fuel their economic expansion?

After China’s economy experienced first signs of diminishing growth in 2016, 2017 numbers so far seemed to put analysts’ minds at ease. With a solid annual growth path of 6.9% in the first quarter of the year, China’s economy beat not only the Chinese government’s own official target at 6.5% but also the analysts’ expectations of 6.8% growth. But while for some people those numbers came as a long awaited relief, others believe that they are symptomatic of a much larger underlying problem of the Chinese economy. Much of China’s current growth is built on its construction and manufacturing sector as well as large amounts of spending into infrastructure expansion such as the building of highways, airports and real estate developments. Much of this spending, both private and public, in turn is credit based, leading to an immense increase in Chinese debt from roughly 125% of GDP back in 2008 to over 277% of GDP at the end of 2016.

Accumulating debt to fuel growth and expansion is not necessarily a bad thing. For China it has worked true wonders during and in the immediate aftermath of the 2008 financial crisis and it were in fact the Chinese markets that, to a large degree, stimulated the global economy as a whole back to life after the crisis. Still, a country can’t rely on debt fuelled growth for ever before, as with every rush, it will eventually encounter the problem of diminishing returns. Simply put, as the Chinese economy is maturing China now needs to accumulate more and more debt to generate less and less growth and when the annual debt growth exceeds the annual GDP growth on a long term regular basis analysts around the world start to worry. Now China has triggered those worries and at the end of May 2017 international rating agency Moody downgraded China from Aa3 (high quality) to A1 (medium to high quality) for the first time since June 1989.

While a minor downgrade like that will likely not have any direct implications for the eastern economic juggernaut it might very well be a sign of what’s still to come. So far Chinese officials have said or done little to change their current policies or ensure people that they have a plan of how to deal with the ever rising corporate debt in their economy. The Moody downgrade surely then will only add to the doubts that are building among analysts and already comparisons are being drawn between China now and Japan at the end of the eighties. The equation is not too farfetched. Japan, too, struggled with drastically rising debt to fuel their growth. In the end unwillingness by the government to deal with hugely indebted Japanese firms led to what analysts now call the “lost decade”, a period of Japanese stagnation during the nineties that in reality extended far into the beginning of the 21^st century making the name “the lost decades” more appropriate.

So will China be the next Japan? At this point it is yet impossible to tell. But while China publically dismisses Moody’s decision as an uneducated decision by an agency that clearly doesn’t understand the intricate workings of China’s economy, Chinese debt does continue to rise and as long as the debt rises, so will the doubts of the international community.

Has Globalization reached its peak?

After the western world witnessed a rising tide of populism in 2016, the first half of 2017 brought first signs of a countermovement to this phenomenon. Elections in Austria and France made it clear that a majority of people in those countries still stood for a globalized and open world. Still, other countries like the US continue on an economic path of protectionism and in fact there are signs that globalization as a whole has considerably slowed down over the past years. Currently global trade is growing at a slower rate than the world economy; one of the only times that that has happened since the mid-1800s. So does that mean that globalization has reached its peak? A new report by the BIS – the Bank for International Settlements – argues that this is not the case.

According to the BIS, which acts as a sort of central bank for the world’s central banks, claims of the slow death of globalization are greatly exaggerated. Still policy makers should need to be even more careful from now on to manage globalization’s side-effects. While the global financial crisis certainly slowed the pace of globalization and problems of uneven wealth distribution remained present, the report states there was no factual basis to suggest globalization was coming to a halt or even going into reverse. The fact that in current times “arguments that question the benefits of globalization have been receiving greater attention in the public debate”, according to the head of the BIS, Jaime Caruana, was a sign that “we risk forgetting the lessons of the past and taking for granted the gains in living standards, productivity and prosperity achieved over the last half-century”.

Last year our very own “Globalization Report 2016” came to a very similar conclusion by calculating for 42 countries the additional growth in GDP they had received over the past 26 years due to globalization and showing that a slowing or even reversing global interconnectedness between countries would have a clear negative impact on economic growth. The solution then should be not to remove our trust from globalization but rather to fight for more globalization and then use the benefits of that globalization to achieve inclusive growth for everyone.

Pricing a national treasure – Is the Great Barrier Reef “too big to fail”?

There are some things in life one cannot rationally put a price tag on. How much do we value friendship, what’s the price of enjoying the company of loved ones and what would we have to pay to equal the value of a sunset? Many people would argue that natural wonders belong in this category too. Luckily, we are all economists here and rarely will an economist let himself get stopped by labels such as “priceless” or “incalculable”. This story of course is no exception, as economists have done the math in an attempt to put a price tag on one of Australias largest national treasures; the Great Barrier Reef. A new report now puts the value of the reef at a grand total of $56bn and warns of the vast and disastrous economic consequences for Australia, should they not act now to do more to protect it.

The report by Australian economic advisory practice Deloitte Access Ecoomics, states that a total of 64,000 direct and indirect jobs were pinned to the world heritage-listed sight and that the reef contributed a proud $6.4bn to Australia’s economy every year. Of those 64,000 Jobs, 39,000 jobs are directly linked to the reef, making the natural wonder a de-facto larger employer than the Quantas Group, the Australian oil and gas extraction industry or the National Australia Bank. In a country that owes its continued growth heavenly to its tourism industry, this essentially makes the Great Barrier Reef essentially “too big to fail” for the Australian economy.

Yet, the report warns, if nothing is done soon, that is exactly what is going to happen. The reef has been shrinking ever more over the past decades as industrial pollution and a generally warmer environment caused through climate change threatens the highly delicate ecosystem. So maybe you can’t put a realistic price on a wonder of nature. While the recent report gives a detailed account of how intricately interconnected the reef is with Australia’s national economy, it naturally can’t put a price on the sense of national proud the reef means for many Australians or on the value of the life of the ecosystem itself for that matter. But does that mean such an economic attempt on pricing the priceless is futile? One can only hope that this is not the case as reports like this, that show how valuable nature is for us humans – not only sentimentally but in actual generated economic value – could help sway policies to increase our focus in protecting what we have before it is too late.