These 5 Drivers Will Shape World Economy in 2018
We're going to consider 5 major factors that will influence the global economy in 2018. On the whole, the topics are the same as last year. However, this year they might develop in an unexpected way.
So, let's start with China. Last year saw the 19th Congress of the Communist Party, dubbed historic by many observers. Its conclusions will determine the development of China's economy and the whole society for a decade ahead.
It's important for us to understand the situation in China for several reasons. In fact, China's economy is the second largest in the world, and it may take the lead in the near future. Undoubtedly, it will have political ramifications for the current leader, the USA. Meanwhile, the explosive growth created certain problems in China, which its leadership is now dealing with. If they fail, all the world economy may face a crisis.
A Dragon's Leap.
Control from the field to the shop. After roughing-out, each Chinese Fuji apple is checked in a specific PC program. The diameter must be 70 mm, and the deepness 80% for apples to make it to the futures market that opened at the Chinese Zhengzhou exchange in late 2017. These are the first futures for fresh fruit in the world so far.
Len Bin, head of ZCE Department of Agricultural Products: «Apples allow to fight poverty in a natural way because major gardens are located in poor regions. The apples are an important source of income for the local farmers. Operations with apple contracts will contribute to the development of commodity futures trade in China and the country's economy as a whole».
The Chinese exchange won't stop at apples. It's planned to introduce futures for the major primary products: pork, cotton yarn, corn. According to the World Bank, China has increased its raw materials import more than threefold.
Due to the rapid economic growth, the country with the largest population in the world is consuming more products and energy than it can produce. China's leadership understands that it's time to gradually open the domestic market.
Xi Jinping, China's President: «We must strive for the free trade and investment in the world. We'll promote liberalization by opening the market. And we're against protectionism as such a policy is like self-isolation. Nobody is the winner in a trade war».
Local businesses are increasingly active abroad. I 2016, investors from China and Hong Kong bought 58 German companies for 12 billion euro. This sum is 20 times as much as the total sum in the previous years.
Andrei Karneev, deputy director of the MSU Institute of Asian and African Studies: «China is worrying that it has quite a lot of companies that are among world's 500 biggest companies, but few of them are leading in technology, business culture, etc. Thus, China is going to master it».
One of the major spheres of the Chinese investments is robotics. The biggest purchases include KUKA, a German supplier of robotic machines, Swedish Robot System Products, and the US HTI.
Margarita Fedorova, SVP of Russian-Asian Union of Industrialists and Entrepreneurs: «China attracted capital, investments, import of capital and export of end products. Now, China has truly moved up to the next level. Now, it's exporting capital. It gives China political, geopolitical odds».
The West is concerned that Beijing's craving for technologies might break the world economic balance. The leadership of many European countries and the USA demand stricter world trade rules, especially, in the field of innovations.
Jeremy Waterman, head of the Chinese center of the US Chamber of Commerce and Industry: «If the projects of Made in China 2025 program are successfully implemented, the US and other states are likely to export only oil, gas, beef and soya beans to China».
1.5 years ago, the US intelligence blocked China's purchase of Aixtron, manufacturing microchips. Washington warned that German electronics could be used in the Chinese military. However, for Beijing technologies are now only a key to the transformation of the national economy.
Wang Yi Min, deputy head of the Center for Development of China's State Council: «Higher quality of goods will boost China's economy to the next level. The economic revival is looming. If we realize it, other countries will be grateful to us for high-quality products at micro and macro levels, as well as for good services and high efficiency».
The 19th Congress of the Communist Party of China made it clear that China took the lead in the global economy. Made in China 2025 and One Belt, One Road projects are the main development landmarks. Gross investment in the infrastructure is $500 billion. There's also an economic corridor in Pakistan, the construction of a port in Djibouti, a pipeline in Central Asia and а high-speed railway to Thailand.
Wang Yi, China's foreign minister: «It's important for us to reach a new level in international relations, building future for the humanity. It's the peaceful innovation-driven development of China. It's the Chinese dream and the global dream to unite all the countries' interests and the human society’s values».
According to Bloomberg projections, China will have the biggest nominal GDP in the world by 2032. Though, China has had the biggest GDP (PPP) for 3 consecutive years.
Alexander Knyazev for Vesti
Back to America.
The US tax reform passed in late 2017 will largely influence the US economy this year too. Consequently, it will affect the Federal Reserve System too. FRS will have to raise the interest rate more rapidly, making dollar credits more expensive. In such a case, the world's financial market will be turbulent, with the demand for dollar soaring. That was the case after the 2008 crisis. This might happen because the US corporations will repatriate their revenue.
Donald Trump, US President: «We're going to bring at least $4 trillion back into the country. This money is now frozen in offshore countries. Some companies are reluctant to return the money. But they won't be able to keep them for a long time».
Naturally, fiscal loosening may not be enough to make dollars return home on a massive scale. Transnational corporations believe that their home is the whole world.
Black gold is shining again.
This year, oil prices may turn out even higher than predicted by the wildest dreams. We're talking about $70 per barrel. The market hasn't seen such levels in a long time. The main reasons for the price surge are the ongoing geopolitical tension in the Middle East and the OPEC Plus agreement.
Khalid Al-Falih, Saudi Arabia's Minister of Energy: «All the producers, both countries and companies, have stood to gain from our actions. Everybody will enjoy it until we reach a balance. After it's established, we'll have to think of how to enter the market gradually. The growth in crude oil prices was accompanied by the growth in demand as well».
Of course, $70 per barrel is an extreme price. $55 or $65 per barrel are more optimal as both producers and consumers are happy with this level, and such prices have no negative impact on the world economy.
There's less oil on the market, and it's more expensive. It was the exact goal of the countries which decided to cut oil production under the OPEC Plus agreement. In November 2016, the price for marker crude Brent was about $44.5 per barrel. Today, the price exceeds $66. It makes the recent unanimous decision to extend the agreement quite predictable.
Bijan Namdar Zangeneh, Iranian oil minister: «Both OPEC member states and independent producers are happy with the price of $60 per barrel of Brent oil».
23 states, 11 of which aren't OPEC members, decided to cut oil production by a total of 1,200,000 barrels per day. The decision was driven by a large surplus on the market, and an unhealthy loss of value of the black gold. It was the first case of cooperation of oil-extracting countries. There were many risks and questions left. Firstly, a boost in shale oil production by the USA was expected, as the US hadn't signed the agreement.
Alexander Frolov, deputy head of the National Energy Institute: «Shale companies increased production. It was initially clear that oil prices would go down. And so they did. The more shale oil production increases, the more it affects oil prices».
But the US oil resources were fading faster than predicted. Shale companies started to suffer losses, and to avoid even more losses, they mostly left the market. Shrinking prices went up again to stabilize. The OPEC Plus strategy worked. But the higher the prices, the more new projects will be launched, which would automatically curb prices.
Igor Yushkov, National Energy Security center: «The growth rate will reduce. That is, we saw $40 grow to $50 relatively quickly, but the growth from $50 to $60, $70 and $80 will be even slower. So, we should be rather optimistic, but sober-minded, about it».
Currently, there is a slight surplus of oil on the market. It might increase if the oil and gas industry in Venezuela will stop due to domestic problems. Nigeria and Libya have undertaken to keep oil production at 1.8 million and 1 million barrels per day respectively in 2018. In fact, Libya's oil and gas industry was paralyzed in 2012-2016. But now it's being revived, and oil investors turned to the African country. However, an explosion on a Libyan pipeline leading to Es Sider on December 25, 2017 made Libya cut oil production and spurred the quotations growth by nearly a dollar in one day.
All these risks are to be considered. That's why it's planned to redesign the deal in summer 2018 in order to keep the market stable. If for some reasons a country has to cut oil production by more than agreed, the states with suspended projects will be able to divide its quota.
Khalid Al-Falih, Saudi Arabia's Minister of Energy: «I am pleased to say that the decision was unanimous. This decision is important. Many of you weren't sure that the deal would be extended till December 31, 2018. The deal will expire in a year. This time will be enough to find common ground».
The situation on the market is positive but extremely vulnerable. Obviously, the deal can't be extended forever. It's all the more so as the main risk is still the credibility gap, especially between Saudi Arabia and Iran. If a participant violates the rules, there will be no more constraining factor. Thus, the next goal is to end this agreement painlessly.
Igor Yushkov, National Energy Security center: «The oil market is very psychological. The traders' reaction will be negative in any case. They all will immediately sell futures, which will become useless, thus, the prices will fall. The difficulty of ending the deal is a key factor. The market is to be prepared for the end of the deal. But I think nobody knows how to do this with minimal losses».
This issue seems to be central to all the coming OPEC Plus meetings. Experts say that ending the deal will take at least 6 months.
Maya Krasavina for Vesti
A footstep away from a collapse.
The EU issue will also be in the spotlight this year. The centrifugal trend and the rise of the right sentiments will plague the life of Brussels politicians. The migration issue seems to take a back seat in the world media, but it's actually no less acute.
Xavier Bettel, PM of Luxembourg: «I think we need a permanent strong migration system. If we don't resolve this problem, we'll inevitably tip into a crisis. We need to adopt a program with quotas and obligations for each country. Everyone must respect each other. Otherwise, we'll get into trouble. Each time we'll tip into a crisis and face challenges. We must take a clear and irrevocable decision. But they're playing the spin game.»
Meanwhile, politics doesn't affect the euro so far. The European currency grew all the previous year. Supposedly, it will continue to do so this year too. The reason for it is that the European economy is showing signs of life. This year, the European central bank may stop its expansionary actions, which will spur the demand for euro.
Meanwhile, the popularity of the euro stems from the mistakes of the Americans rather than the achievement of the Europeans. Under a specious excuse of fighting shadow capital, the US authorities have actually been dispossessing the rich all around the world. It's about a crackdown on offshore businesses and persecuting rich foreign citizens who don't pay taxes regularly according to the US authorities. Moreover, one of the US banks blocked the money of the Kazakhstan National Fund in late 2017. The US actions seek to direct the financial flows to America.
The situation is one of the reasons for the surge in popularity of cryptocurrencies. Last year's craze won't stop this year.
While a year ago everyone who viewed themselves as a market expert said: «Bitcoin is an accessible alternative to a Swiss bank», today it's vice versa. The owners of cryptocurrencies should acquire a safe deposit box somewhere in the Alps and replace Bitcoin at least partly for dollars. December saw an unprecedented symbiosis of paper and digital money in one portfolio.
Todd Gordon, investor, video blogger: «I just want you, guys, to be careful with your money. We witness the biggest bubble in the history of the financial markets. Read about the notorious tulip mania in Holland of the 17th century. Will we suffer the same nose dip? I don't know. But I know for sure that this fall has already surpassed the Dot-com and 2008 crises in terms of percentage».
The fall lasted for no more than 48 hours. By Sunday, the cryptocurrencies tried to recoup, but failed. The heavyweights, investment banks, took the side of «the bears». JP Morgan Chase predicted that the price of bitcoin might be zero soon and advised the clients to abandon it. As usual, the recommendation immediately leaked to the Internet. Although, the financial conglomerate had criticized the cryptocurrencies earlier too, never forgetting to add them to its portfolio.
Alexander Gerchik, financier: «There's a so-called pump and dump strategy. There are strategies to boost an instrument that cost 1 cent yesterday and cost 15 cents today. That is, the price of a cryptocurrency increases 15-20 times. So, it's quite expected that the price falls. You can't say: „I didn't expect the price of bitcoin to fall!“ if 4 days ago is cost 20,000 and today it costs 12,000».
So, it's definitely not the case of a digital pyramid scheme.
Alexander Gerchik, financier: «You can't compare bitcoin and a Ponzi scheme as there's bitcoin trading, the amount of bitcoin is huge now. You can withdraw, with losses, but you can, unlike a Ponzi scheme».
Differences start here. Stock exchanges guarantee the recovery of losses, while cryptocurrency exchanges don't. Let's recall early December to illustrate it with an example.
Ryan Hildreth, investor: «When bitcoin sold off, and its price fell from $19 to $15 thousand, we saw all these so-called exchanges close for a backup. It resulted in 200,000 unconfirmed transactions in the blockchain system. Some of them aren't closed even now».
It's about the system's capacity. Blockchain processes 4 transactions per second, while Visa processes about 1,000. In November-December, the inflow of investors to the cryptomarket grew exponentially, while the situation with the demand was the other way around.
Alexei Muratov, founder of PRIZM cryptocurrency: «Bitcoin is said to be a decentralized instrument, but in reality, it isn't so. A mining race, a race to produce this bitcoin, gave all the power to big mining pools. There are some dozens of them today, but tomorrow there might be one bit mining pool which will emit all new coins. And this big mining pool will lay down the rules for the whole community».
The fathers of cryptocurrency were the first to withdraw from it in December. For example, the founder of the Litecoin project, and many others who have kept the bitcoin mined back in 2008 on hard drives. Isn't here too much coincidence?
Andrey Dyachenko, financial analyst: «Random manipulations with API wallets blocked many users' electronic wallets for quite a long time. If it weren't so widely used now, I think such a bug could have existed for a long time. It's a range to test technologies. The technology is unfinished, all the current hardforks come as a result of the evolution of this technology. The more craze around cryptocurrency, the more opportunities to test the mistakes».
For now, it's only an assumption.
Anna Redkina for Vesti
So, geoeconomically, this year is going to be very interesting. We'll see new technologies being introduced faster, especially in IT, genetic engineering, production of new materials. That is, the Industrial Revolution 4.0 will ramp up.