World economic boom and lurking risks

Economies are growing, wherever you look - in Germany, India and elsewhere. Naturally, everyone believes that this will continue unabated. But there are risks that should not be underestimated, DW's Henrik Böhme warns.

By: | Updated: January 22, 2018 9:33:04 am
Merkel sees 'tough day' in crunch German coalition talks Germany’s economy is expanding at a solid pace at a time of improving prospects for growth in other European Union nations as well as in the wider world. German Chancellor Angela Merkel (AP Photo)

At the turn of the century, the German economy was regarded as the sick man of Europe. Tough labour market reforms implemented by the then Chancellor Gerhard Schröder’s government helped the country turn the corner.

Germany has now seen its economy expand for eight consecutive years. Unemployment is at a record low, the government is flush with cash due to swelling tax receipts and budget surpluses, and German exports continue to outstrip imports yielding huge trade surpluses.

But the sustained boom in Europe’s largest economy may now be in danger of overheating.

For the past several years, the German government’s savings drive and penchant for presenting balanced budgets has led to creaking infrastructure, ill-equipped schools and universities, and delays in expanding the nation’s broadband network, among a raft of other problems.

Furthermore, Germany faces an acute shortage of qualified staff in many industries. Although the country has seen a rise in the number of skilled foreign workers, they are still no where near the level required to filling the gaps on the labour market.

Germany’s economy is expanding at a solid pace at a time of improving prospects for growth in other European Union nations as well as in the wider world.

Fellow eurozone nations returning to a path of growth is good news, given that even debt-stricken Greece has logged a small expansion as have other former problem children such as Spain, Portugal and most certainly Ireland. Italy remains a cause for concern, though.

Last month, Deutsche Bank economists put forward a forecast that the global economy will grow by 3.8 percent in 2018. Other pundits have made similar projections. What’s special is that for the first time in a decade, i.e. for the first time since the global financial crisis, nearly all world regions are growing in sync again, with the exception, perhaps, of the war-ravaged Middle East.

In Asia, China and India continue to lead the pack. India’s economic growth is projected to slow during the financial year 2017-18, but it’s still forecast to expand by a robust 6.5 percent.

And India still remains among the world’s fastest growing economies. Prime Minister Narendra Modi’s government has also eased regulations for foreign investors in an effort to attract capital and boost growth.

Next week, Modi will also become the first Indian prime minister to attend the World Economic Forum in Davos, Switzerland, in 21 years. He is expected to hot-sell India as an attractive investment destination.

In recent years, the country has become an attractive destination for foreign investment, receiving, for instance, more than $60 billion in FDI in the past financial year alone, representing an all-time high. Furthermore, India is set to overtake the United Kingdom and France to become the world’s fifth largest economy next year.

Despite the overwhelmingly positive news from across the world, the global economy still faces a raft of threats and uncertainties, which could imperil global recovery and trigger another crisis.

It may be that the banks have become somewhat less crisis-prone as a result of re-regulation (mind you, the Donald Trump administration in the US wants to re-deregulate the banks). But there are plenty of other risks.

The tax reform Trump’s Republican Party has put in place may distort the highly sensitive structure of world trade. On the one hand, it’s good that Trump wants to strengthen the economy of his country. If everything goes as US strategists hope, the US current account deficit (essentially the balance of imports and exports) could be halved. In addition, US companies such as Apple – which have long indulged in rigorous tax avoidance strategies – would at long last have to pay taxes at home.

Donald Trump, an inadvertent leader in tax justice? That would be something.

But of course, there are often losers somewhere if there are winners elsewhere. German exporters are worried about their American sales. Industry lobbyists are already beating the drums in Berlin for a reform of corporate taxation, to compensate for possible disadvantages generated by the new US corporate tax reduction measures.

On the political front, no one knows how the volatile situation on the Korean Peninsula will evolve. More trouble is also brewing in the Middle East, and if it gets out of control, it could shock the global economy. And the man in the White House appears to be stumbling around with a match, looking for fuses to light.

So it’s essential to remember that every boom also carries within itself the germ of a crisis. If you’re driving full steam ahead all the time, you risk losing sight of problems up the road.

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