Deglobalisation unlikely, economy to coalesce into two blocs centered on US, China

Geopolitical and economic strains are unlikely to lead to deglobalisation and, instead, push the world economy to consolidate into two blocks with opposing powers at the centres, the group chief economist at Capital Economics said.

“Some global links will be severed but others will strengthen,” Neil Shearing said in a note on October 3. “Rather than deglobalising, we think the world economy will coalesce into two blocs centred on the US and on China – a process we’re calling ‘fracturing’.”

The global economic landscape will shift, the impact on macroeconomic prospects of major advanced economies, all allied with the US, will not be significant.

The US dollar will maintain its dominant position and the US financial system will continue to provide the financial plumbing for the globe, the economist added.

Moreover, efforts by countries to secure supply chains for key products and commodities will affect only a small slice of global trade.

“At the margin, productivity growth will be lower and inflation higher, but any changes will be small and outweighed by other factors,” Shearing said.

Meanwhile, the impact on productivity growth in China and some of its allies will be substantial.

Capital Economics - fracturing

“The wider reach of the US-led bloc, and the broader networks within in, will help it to adapt to the challenges posed by fracturing. In contrast, the China-led bloc will be dominated by China itself, making adaption harder and therefore increasing the potential economic hit,” the economist said.

The house expects China’s growth rate to slow to 2 percent by the end of this decade.

The productivity-sapping effects of fracturing will also mean that the China-led bloc’s weight in the global economy will not increase substantially further.

As long as a crisis is avoided and the fracturing results only in a partial roll-back of prior decades of integration, economies and financial markets will adapt gradually to the new environment.

However, if tensions between the blocs escalate to confrontation, it would result in severing of economic and financial ties, crippling global industry, causing shortages and rampant price rises, Capital Economics said.

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