Continued failure to resolve global trade imbalances threatens to spark a new economic crisis without urgent measures to boost domestic consumption in China and Germany, a chorus of experts has warned.
Michael Pettis, finance professor at Peking University, told Emerging Markets that the international economy was resting on a knife-edge with Japan, the United States, China and Germany all seeking to boost exports and lower domestic consumption.
“All the key economies are seeking to boost their external trade positions but mathematically and politically that cannot happen. Something has to give and a crisis looms,” Pettis, a renowned China expert, said.
The comments put the spotlight on Germany’s insistence that eurozone countries tighten fiscal policy to resolve the debt crisis and contrast with cautious optimism over China’s recent efforts to rebalance its growth model.
Pettis said that Germany needed to embark instead on fiscal stimulus and lower consumption taxes to boost domestic demand – and, thus, exports from peripheral Europe to northern Europe – to arrest the eurozone’s economic decline.
But he said: “Germany is fighting tooth and nail to stop this from happening.”
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| Michael Pettis, finance professor at Peking University |
The need for reform was echoed by ADB president Haruhiko Kuroda who said that the eurozone contained countries with large current account surpluses and large current account deficits.
“Even within the single currency zone, excessive internal imbalances cannot be sustained,” he said. “One way or another, sooner or later, these internal imbalances must be addressed.”
At the same time, the reduction in China’s current account surplus from 10% of GDP in 2007-2008 to around 4% last year was “driven wholly by reduced external demand while China’s low consumption rate has not changed since the global crisis,” Pettis said.
Meanwhile, Japan is looking to increase taxes - which would “inevitably” reduce domestic consumption - in order boost its trade balance while the US is taking steps to reduce its structural trade deficit after years of consumer indebtedness, he said.
If Japan, China and Germany fail to increase domestic consumption in the coming years, a “global demand deficit” will continue to blight the global recovery, entrenching sovereign debt risks, trade protectionism fears and currency instability, he said.
“Predicting when a crisis will kick off in Germany and China is a fool-hardy endeavour but on the current trajectory it’s simply a matter of when, which will lead to much slower global economic growth,” he said.
His views contrast with Stephen Roach, the non-executive chairman of Morgan Stanley Asia, who told Emerging Markets that Chinese policymakers were taking “decisive steps” in rebalancing the country’s growth model in particular, moves to adopt a more market-based currency regime. “Betting against China has proven a wrong bet for past 32 years and will prove the wrong bet in the coming decades,” he said.
Consensus opinion holds that global macroeconomic imbalances— large-scale borrowing and consumption by the US and peripheral Europe, in particular, and lending by creditor nations, such as China, Germany and Japan —helped to trigger the financial boom and bust. Structural trade imbalances now remain largely intact in Germany and China, Pettis concluded.
“History – namely the example of the US during the Great Depression - shows that surplus nations are those that suffer the most when global trade imbalances correct,” he said.
This article was originally published by Euromoney’s sister publication, Emerging Markets