April 6, 2017 10:00 am JST

Editorial: Now is no time for economic complacency

Governments must pursue structural reform, not rest on laurels of tepid growth

The global economy is improving somewhat -- the deflationary concerns that have persisted among developed economies since the 2008 global financial crisis are easing, and emerging economies are showing greater stability -- but the strength needed for a full-fledged recovery is still lacking. Many companies are still cautious about capital investment, as productivity growth remains weak. There is also the risk that U.S. rates hikes could disrupt emerging economies.

Far from being complacent with the current economic upturn, developed and emerging economies alike should ratchet up their structural reform efforts to increase growth potential. At the same time, the world must work together to stem the rising tide of protectionism that threatens to stifle growth.

The global economy is projected to grow 3.3% this year, up 0.3 percentage point from last year, with growth of 3.6% predicted for 2018, according to a forecast released by the Organization for Economic Cooperation and Development in March.

The projected expansion of the global economy owes much to resurgent U.S. growth, and economic conditions in Japan and European countries are also beginning to show signs of brightening. Resource-exporting countries, such as Brazil and Russia, are finally putting the worst behind them, buoyed by recent rebounds in commodity prices.

With stability returning to both developed and developing economies, the pessimism toward the global economy that was triggered by the "yuan shock" -- the major fall in the Chinese currency's value in early January 2016 -- has receded. Viewed from a slightly longer perspective, it may be safe to say that the prolonged correction phase following the global financial crisis is finally coming to an end.

But it is still too early to breathe a sigh of relief. Though economies may be showing signs of improvement, their underlying weaknesses and risks remain unaddressed.

One cause for concern is that the foundations for further growth are not firm yet.

Despite improved earnings, corporate capital spending in advanced economies lacks momentum. As for emerging economies, their current stability is largely attributable to higher resources prices.

Another cause for concern is excess debt. Chinese companies -- state-owned enterprises in particular -- have been slow to address this issue. Other emerging economies are home to numerous companies saddled with piles of foreign currency-denominated debt.

The U.S. Federal Reserve is poised to quicken the pace of its rate hikes. Faster rises in U.S. interest rates and the value of the dollar could wreak a havoc on the economies and currencies of developing countries with too much debt.

Still another concern is the risk of protectionism gaining ground around the world. Global trade is showing signs of recovering from its stagnation, but if the administration of U.S. President Donald Trump adopts trade-curbing measures, such as higher tariffs, the result would be a quick shrinkage of international trade. There are also fears global businesses may be deterred from investment by fears of a possible trade war.

LAYING FOUDNATIONS The question is how to provide impetus to a global economy that is only beginning to stabilize and sustain the momentum of growth.

With the supply-demand gap all but closed in major developed economies like the U.S., policy focus should shift away from stimulating economic activity toward strengthening economic structures to lay the foundations for future growth.

What is important is improving the economic environment -- increasing the vibrancy of economic activity through such measures as deregulation and the reform of relevant laws. Policymakers are required to take steps to boost new demand that comes from technological innovations, such as making it easier to use "big data," and to promote the shift of workers to growth areas. Also important is to help those who are left behind rapid technological innovations and the wave of globalization to acquire vocational skills and get better-paid jobs.

Perhaps the most pressing issue is the need to halt the spread of protectionism.

Late in March, Trump signed a new executive order requiring the Department of Commerce and other authorities to conduct an in-depth investigation on the fairness of trade practices by countries with which the U.S. has trade deficits, such as China and Japan. The White House said the administration will take action if any problems are found.

It is wrong to try to redress a trade imbalance between two countries by imposing unilateral measures. Such a move could threaten free trade and trigger a retaliatory exchange of sanctions. Governments around the world should speak out against the U.S. administration's stance and counter protectionism by promoting wide-area free trade agreements.

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