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23 Oct, 2014

Chinese commentary: Out of the Global New Normal – New G7 vs Old G7

By Yao Xinyu

Gao Yinan (People’s Daily Online), October 20, 2014 – There is a strong possibility that the seven new emerging market economies are surpassing the seven old industrial countries. The total GDP of Brazil, Russia, India, China, Mexico, Indonesia, and Turkey will exceed the total of the old Group of Seven.

New Normal is a term in business and economics that refers to financial conditions following the financial crisis of 2007-2008 and the aftermath of the 2008–2012 global recession, and has been used in a variety of other contexts to imply that something which was previously abnormal has become commonplace. Now, 6 years later, the global economy still remains in the “New Normal” swamp. There is no sign of expected structural reform; on the contrary the global economy is becoming even more sealed. Most ironically, the person who coined the “New Normal” term, Mohamed A. El-Erian, has lost his job as well.

Based on the latest statistics from McKinsey, the level of globalization has still not recovered from the global recession, and financial flows are still less than 70 percent of the previous level. Debt is the “weather vane” of finance. Under the economic downturn, the level of debt in the global economy has been soaring, with sovereign debt getting steadily worse. According to the Geneva Reports, the total global burden of indebtedness represented 215 percent of national income in 2013, while in 2001, the number was 160 percent.

According to the World Economic Outlook published by the IMF, the seven new market economies will progressively surpass the seven old industrial countries. i.e. the total GDP of Brazil, Russia, India, China, Mexico, Indonesia, and Turkey will exceed the total of Canada, France, Germany, Italy, Japan, UK, and US. Though this conclusion is also based on the algorithm of “purchasing power parity” (PPP), it still highlights the weakness of the developed economies as a whole.

If you assume that this is no more than another repetition of the old investment banking analyst saw – that the new Group of 7 will bail out the old G7 economy – then you are wrong. Compared with the past the growth rate of the new emerging market economies is slipping, but the developed economies are even worse — Japan in particular is struggling with its Abenomics, and Europe is becoming Japanized. The UK and the US are the only ones holding out any promise. What provides even more of a contradiction is that the powerful return of the US dollars from the United States’ improved performance may be a strong hit on the other economies.

So what can be counted on for future growth? The last Golden Age resulted from globalization, loose regulation, cheap interest rates, and demographic dividends. But the key factor is the development of technology. The most typical example is the Information Revolution of the 1990s. Though the dotcom boom did not end well, great companies like Google, Microsoft, Apple, Amazon etc. expanded the production-possibility frontiers of human economic life.

That is why short economic prosperity still strongly relies on the development of technology rather than on the possibility that the new G7 may surpass the old G7. And innovation will be the key to economic growth, whether it comes in the form of wearable artificial intelligence, 3D printers, or some crazy experiment that we haven’t even heard of yet.

This article is edited and translated from 《全球走出新常态：新G7 PK老G7？》，source: Beijing News, author: Fei Xue