Why the global economy should matter to you
As investors, business owners or an employee, it’s important to understand the importance of the global economy.
But before plunging head first into the significance of the issue, one must first understand what it is, to begin with.
In a nutshell, the global economy refers to the economy of the world, comprising of different economies of individual countries, with each economy related with the other in one way or another.
A key concept in the global economy is globalization, which is the process that leads to individual economies around the world being closely interwoven such that an event in one country is bound to affect the state of other world economies.
In the past century or so, the focus on globalization has intensified a lot. More and more trade has been done between different countries, and restrictions on movement and business across borders have been reduced a great deal.
The resulting phenomenon is what a global economy is all about. People are now able to sell their commodities in any market across the world. Likewise, consumers also enjoy a much wider variety of goods and services since they can sample them from other places and not just their own countries alone.
Global Economic Developments
After noting the importance of the Global Economy, it follows as the next step, to have an overview of the recent global economic developments. This will provide a bigger picture of Guyana’s possibilities and capacity in the international markets.
According to the World Economic Outlook, global economic growth in 2015 contracted to 3.1 percent. Growth in advanced economies was estimated at 2 percent, slightly better than in 2014. Factors responsible for this outcome included modest recovery in the Euro Area, positive growth in Japan, declining oil prices, an accommodative monetary policy and, to some extent, depreciating exchange rates.
According to the Ministry of Finance, developing economies recorded slower growth, as a result of continued low productivity growth, high debt, and reduced commodity market prices. Emerging market economies were severely affected by the financial market volatility spike, in August 2015.
That, together with falling commodity prices, led to the weakening of currencies for many emerging markets and contributed to a lower growth rate of 4 percent, in 2015, compared to 4.6 percent, in 2014.
In the Caribbean region, commodity exporters are projected to have grown by 2.0 percent and tourism-dependent economies, by 2.3 percent. However, growth in Latin America and the Caribbean is projected to have declined by 0.3 percent, in 2015.
Lower commodity prices have been responsible for the deterioration in the terms of trade, widening current account deficits, exchange rate depreciation and weakening investment in the region.
Prospects for 2016 are far from encouraging. Global economic developments remain hostile, with heightened uncertainties against the backdrop of increased interest rates in the USA and economic slowdown in China.
As a result, global growth, in 2016, is now pegged at 3.4 percent. Growth in the advanced economies is projected at 2.1 percent; emerging market and developing economies, 4.3 percent; and Latin America and the Caribbean, -0.3 percent. It is this challenging environment that Guyana’s economy will have to navigate and subsist.
Given the structure of our domestic economy, with its heavy dependence on primary products, in the expected mix of soft commodity prices and continued tumbling oil prices, focus has to be on accelerating production 6 and, through our various policy measures and reforms, stimulating growth and exports.
GUYANA, THE CARIBBEAN AND THE GLOBAL ECONOMY
Eight years after the Global Financial Crisis, in 2008, the slow pace of growth in the world economy has placed a strain on many Caribbean economies. Given its small and open nature, Finance Minister, Winston Jordan said that the Caribbean remains vulnerable to the external forces in the world economy.
For 2016, he said that the IMF predicts that the world economy will grow by 3.1 percent, the same level achieved in 2015, with considerable downside risks. He said that slow world growth negatively affects our regions through two major channels: reduced tourism, and reduced demand for our commodity exports.
Despite tourism-dependent Caribbean countries experiencing a steady inflow of tourists from the United States in 2014, Jordan said that with arrivals increasing through 2015, with growth in the United States expected to decline in 2016, these countries may face more challenges in the years ahead.
While low commodity prices, especially oil prices, have been favourable for tourism-dependent countries, Jordan said that commodity-based Caribbean countries such as Suriname and Trinidad and Tobago have been devastated by falling prices for their key exports, including oil.
He noted that Trinidad and Tobago’s economy has contracted each year since 2014 and this situation has continued into 2016, while growth in Suriname declined significantly in 2015 and is expected to be negative in 2016.
The Finance Minister said that commodity prices have shown some recovery in 2016. However, even as this occurred, the global economy experienced another shock—the United Kingdom’s vote to exit the European Union (“Brexit”).
The results of the vote shook global financial markets: volatility spiked, and the British pound fell against major world currencies. Financial markets stabilized in the weeks following the vote, but economists believe Brexit could have longer-term negative impacts on growth of the British, and global, economy.
To date, the impact of Brexit on the Caribbean has been muted. However, slower growth in the United Kingdom and Europe could have negative impacts on tourism and reduce demand for our exports.
To help Caribbean economies successfully navigate these external shocks, Jordan said that the IMF needs to provide more appropriate policy options and support; including support for expanding fiscal space to enable countercyclical policies, and developing more diversified economies through better business environments, enhancement of human capital, and greater economic integration within the region.