November 2016: Eastward shift

The world’s centre of economic gravity is shifting east. Asia now makes up over a third of global GDP, up from 24% only a decade ago. Following impressive rates of economic development, the continent’s influence is spreading to areas beyond trade and investment, including financial flows, global currency reserves and matters of banking and capital market supervision and regulation. Asia, in all its many facets, exerts a considerable pull on world economic and financial affairs. It seems appropriate then that 16 November marks the opening of OMFIF’s first overseas office in Singapore. October saw the inclusion of the renminbi in the International Monetary Fund’s special drawing right, making it the first emerging market currency to join what has become a small group of currencies with international reserve asset status. While the dollar’s dominance will take a long time to fade, as Steve H. Hanke and Javier Guzmán Calafell write, a move towards a multicurrency system where the renminbi will be a protagonist is inevitable. Central banks around the world are taking notice. This month’s Focus with contributions from Le Xia and Yaseen Anwar highlights the systemic nature of the renminbi’s currency swap network.

The outlook for the renminbi will be driven by China’s economic trajectory. Following fears of a hard landing earlier in the year, this month’s Advisory Board Poll sets a calming tone: only 6% of respondents expected China to experience a recession over the coming five years. However, this share rose to 22% for the extended forecast horizon of the next decade. China faces the challenge of transitioning to a period of slower growth with a greater focus on services and domestic consumption. So far, its growth has been achieved through a push on investment, something that other economies in the region can emulate. Ashfaque H. Khan discusses lessons for Pakistan. However, to manage its own transition, China will need to shift its focus away from investment, which is reaching diminishing returns domestically. It can now apply its expertise and resources in infrastructure investment to other regions. Yaseen Anwar, former governor of the State Bank of Pakistan, outlines the benefits of the ‘One Belt, One Road’ project. Additionally, China’s move to a service-based economy will make room for other Asian economies to move up the value chain. Shaokai Fan of the World Gold Council examines gold demand from Asia’s rising middle class. One notable exception to Asia’s economic dynamism remains: Japan. John Plender, OMFIF’s chairman, outlines three problematic scenarios for Japan’s debt trap. While not as high as Japan’s, the debt-to-GDP ratio in Greece is also highly problematic. Danae Kyriakopoulou warns that expectations for an economic rebound in 2017 rest on questionable assumptions regarding debt sustainability. The economic outlook for the rest of the euro area remains anaemic too, while the US economy is constrained by structural supply-side factors.

Despite relatively low growth, concerns over inflation are likely to encourage the Federal Reserve to raise rates at its December meeting, argues Darrell Delamaide. Marsha Vande Berg adds that the US is expected to assume a more protectionist attitude whoever wins the 8 November election. This shift to protectionism is, however, not mirrored in the new forms of establishing trade relationships. Modern preferential trade agreements go beyond just tariff cuts, and increasingly address non-tariff barriers such as harmonising regulations for services trade, argue Alberto Osnago, Nadia Rocha, and Michele Ruta of the World Bank. Ben Robinson examines this case for Europe, focusing on the outlook for a single market for services following Britain’s EU referendum result. The UK itself would have benefited from a more deregulated environment for services trade, but also from a weaker pound. Roger Bootle’s and John Mills’ book The Real Sterling Crisis earns a glowing review from Brian Reading. In a second book review, Danae Kyriakopoulou casts a sceptical eye on the proposal to bring control of sovereign wealth to the people.

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