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China becoming old before being seriously rich?

The Global Economic Themes report jointly published by ACCA and IMAE, two top accounting institutions, note that China is global economy's main engine but its working population has started to age before country's full transition from middle income to high income country - this may have implications for the global economy. Many in China will find this concern interesting.

China

When ACCA and IMAE, two key global accounting institutions, issued their joint report in the first week of February 2020, one of the challenges they noted, for global economy, was that China, global economy’s main engine, is fast ageing before becoming real rich.

The  Global Economic Themes report was jointly published by ACCA (the Association of Chartered Certified Accountants) and IMAE (Institute of Management Accountants) in the first week of February. The report examines three of the longer-term structural issues that are affecting the global economy as well as the global economic impact of the US-China trade tensions. The three issues are:

China – becoming old before being rich?   

Many analysts have predicted that this century will belong to China. Indeed, China has great advantages, including a modern infrastructure, a large domestic market that allows firms to exploit economies of scale and an advanced digital economy. But there are challenges that must be overcome if China is to succeed in propelling itself from a middle-income country to a high-income one. High levels of debt, especially among State-Owned Enterprises, are now limiting the ability of the authorities to stimulate further growth through lower interest rates. Currently the interest rate is at its lowest at 4.15%.

China’s economy now faces very serious challenges with the coronavirus epidemic. Extended factory closures and travel restrictions may well completely stall the economy in the first quarter of the year

Report points out that the population of working age in China (between 16 and 30) is now declining as the population as a whole is aging. This will both reduce the trend rate of GDP growth and increase the dependency ratio if there are fewer workers in relation to an increasing number of older people who will depend upon state services. And China has yet to fully mature from a middle-income country into a high-income country (like North American and the EU Zone) that can cater to the high standard living needs of its old population.

The Euro Fiscal integration needed

The Euro has survived its first two decades, despite several financial crises that threatened its very existence. But it has not been a success – it has failed to deliver the real economic convergence among its members claimed for it at the outset. Indeed, the Euro Zone policy of “One Size Fits All” monetary policy has delivered economic divergence, not convergence across the 27 member states.

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History suggests that monetary unions only survive in the long run if they become fiscal unions too. The next two decades of the Euro are likely to see further progress in this direction ultimately resulting in a eurozone Finance ministry with tax and spending powers. Limited progress so far has come following financial crises and a prime candidate for the next eurozone crisis is Italy, where public sector debt is very high and the banking system increasingly fragile.

The United States’ public debt challenges

The U.S. economy has now expanded continuously for over 10 years, the longest such period in over 150 years. But there are structural changes that represent challenges for policymakers. Perhaps the greatest concern arises from the level of public sector debt, which is on track to reach its highest level since 1946. More positively, the U.S. can operate at lower levels of unemployment without generating upward pressure on inflation.

Finally, the resurgence of the oil industry and the emergence of the U.S. as a net exporter of oil is a big positive for the US economy because it is not reliant on the Middle East for supplies. But again, it is one that requires an adjustment in policy responses and may introduce greater volatility to the economic cycle. Now a lot of investment and spending is tied into the oil market therefore this could increase volatility in the oil sector.

The economy continues to expand, and fears of a recession have quelled with continued consumer spending and rising wages

Michael Taylor, Chief Economist at ACCA said: The articles in the Global Economic Themes report look at economic issues that are likely to have an impact over the longer term.

US-China Tensions

Throughout much of last year, US-China trade tensions increased which undermined business confidence and investment as well as contributing to a sharp slowdown in global trade. A recent improvement in trade relations resulted in a Phase One Trade Deal which included a modest reduction in some tariffs.

Taylor added: China’s economy now faces very serious challenges with the coronavirus epidemic. Extended factory closures and travel restrictions may well completely stall the economy in the first quarter of the year. But provided the virus is brought under control soon, we would expect activity to recover fairly quickly later in the year. However, a prolonged crisis could result in a more permanent reduction in Chinese economic growth for example, if there were significant job losses that further reduce consumer confidence and spending.

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Raef Lawson, Ph.D., CMA, CPA, IMA vice president of research and policy, said, ‘We saw confidence in the U.S. tread low throughout the year before an uptick in Q4. The economy continues to expand, and fears of a recession have quelled with continued consumer spending and rising wages. With 2020 being a U.S. presidential election year, confidence should continue to move upward.’

GVS News Desk with input from Agencies, ACCA site. 

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