The dollar may determine global economic recovery
- By Zhang Jingwei
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E-mail China.org.cn, December 20, 2014
Looking back over 2014, Western countries seem optimistic about the safe landing of their Noah's ark amid the flood of the economic crisis. In fact, it is a situation in which only one country is happy and many are worried and troubled.
The latest U.S. economic statistics show the number in employment increased by 321,000 in November. Since the Federal Reserve announced in October that the "Quantitative Easing Policy" (QE, an unconventional monetary policy used by central banks when normal methods don't seem to work) would gradually be removed, the United States appears to be entering an economic recovery period. The rest of the world, however, is in fear of a new crisis occurring.
There are three major reasons for this.
First, international crude oil prices continue to fall after the Organization of Petroleum Exporting Countries (OPEC) decided not to cut production. Influenced by a strong dollar and stock market pessimism, New York crude oil futures dropped by 4.2 percent to US$63.05 per barrel on Dec. 8. At the same time, the Brent crude oil futures price in London also fell by US$2.62 to US$66.45 per barrel.
A report by Morgan Stanley forecasts that the Brent price will probably drop to US$43 per barrel in the second quarter of next year. With Russia heavily dependent on energy resource exports, such a decline could certainly trigger a financial crisis, while also imposing unbearable pressure on OPEC member countries like Saudi Arabia and Kuwait who refuse to cut their production; while Iran, Venezuela and other oil-producing countries will also face difficulties. Even U.S. shale oil development could come to a standstill due to losses.
The fluctuations in international crude oil prices highlight the substantial reduction in global demand for oil and are also an obvious symbol of global economic contraction. China's imports dropped by 6.7 percent in November, a sign showing China's economic downward trend.
As the engine of the global economy, China has had an insatiable appetite for energy and commodities in recent years. The current decline, therefore, indicates that the prospects for the global economy are not so bright. More importantly, the strong growth of the dollar indicates an American economic recovery as well as a decline in oil and commodities prices through exchange rate fluctuations. This logic has not only resulted in a worsening situation in energy and resource producing countries, but also sluggish global demand.
Second, there are severe geo-political crises, with Russia being a typical example. The slump in crude oil prices has led to a severe shrinkage in Russia's foreign exchange reserves and a decline in its comprehensive national strength. It has been reported that, since the Ukraine crisis and the fall in commodity prices, Russia has declined from being the world's eighth largest economy to struggling to maintain a position equal to countries like Spain and South Korea.
Western sanctions imposed over Russia will continue. However, an energy crisis together with a geopolitical crisis could trigger a reckless move. In fact, Russia did take such steps – receiving Choe Ryong-hae, the second most powerful leader of North Korea, and suddenly suspending the US$50-billion natural gas pipeline project to Eastern Europe.
Combined with Western actions, President Putin's "resource nationalism" will cause profound and dangerous changes to the geo-political and economic landscape in Europe.
The U.S. economic recovery will enhance President Obama's confidence in maintaining sanctions on Russia. His domestic measures have been frustrated by a Congress, now under Republican control; however, there is consensus on the Russian sanctions. The pressure the United States is putting on Russia is not only a disaster for Russia, but also unbearable for America's European allies deeply sunk in deflation.
Third, prospects for the European and Japanese economies are not optimistic. The European Central Bank has been hesitant in implementing an easing policy to deal with countries that are emerging from sovereign debt crises but are seemingly trapped in a vicious circle of deflation.
Although involved in a currency link, the different economies in the eurozone have varying characteristics. The European Central Bank monetary policy will face a lag period from the decision to implementation. The biggest problem facing the eurozone is not only monetary policy, but also collective mediocrity that could lead the policy to capsize.
The "bellwether," Germany, is no longer Europe's hope in coping with the sovereign debt crisis. It is facing the risk of an economic downturn, too. Policy coordination and efficiency in execution within the eurozone will be crucial.
"Abeconomics" (a word that has been used to describe Shinzo Abe's economic policies in Japan) looked very efficient when it was first introduced, but the effect has not been good. According to the second amended value data of third quarter GDP released by Japan on Dec. 8, there was a quarter-to-quarter drop of 0.4 percent; calculated on an annual basis, that would mean a contraction of 1.9 percent.
The worst crisis-hit areas are emerging markets. Affected by the rising dollar and decline in Chinese demand, exports in resources from emerging markets were the first to suffer, leading to currency devaluations. The Bank for International Settlements (BIS) reported that a strong dollar had exposed the financial fragility of emerging markets.
That is both puzzling and yet logical. In the first quarter of this year, the vision of the American economic recovery encouraged international capital to flee from emerging markets. Now, the U.S. economic recovery is no longer a mirage but a reality. With China's economic growth heading downward, Europe and Japan sinking into deflation, and international crude oil prices slumping, a strong dollar has ensured any international economic recovery will take its cues from the superpower. A sluggish economy and financial crisis, coupled with imported inflation, pose challenges the emerging market will have to face for a long time.
The most disturbing problem, however, is that, in an era of globalization, the post-crisis dilemmas will affect the United States, too. Therefore, there are concerns about the resilience of the current U.S. recovery.
The writer is a researcher with the Charhar Institute, a nongovernmental organization which is engaged in studies on diplomacy and international relations.
This article was translated by Li Jingrong. Its original unabridged version was published in Chinese.
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
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