March 30, 2016 | by Steve Lawrence

The Industry and Global Economy at a Historic Turning Point

As China shudders, the world’s economies gasp for breath

The industrial metals industry and the global economy, with China at the center, will be struggling with dramatic structural change over the next five and 10 years. Yale School of Management Dean Emeritus, Jeffrey Garten told MSCI’s Carbon Conference attendees in February that “we are at a historical inflection point” that requires “vigilance, a constant awareness of changing markets, and a critical emphasis on your customer relationships and investments in the right people to help you understand, adapt, and compete in this new world.”

Garten said that ‘for the next several years your industry will face unrelenting trade pressure” because “the framework of the global economy as we have known it is falling apart.” China’s extremely disruptive and unavoidable economic and civil problems will affect every country and key industry in the world. The uncertainty over what will unfold in China and its global markets is only intensified, he said, because of the political and economic uncertainty in the United States.

The global economy, he pointed out, has been based on several U.S. sponsored assumptions: That the expansion of trade, a market oriented system, and more multi-lateral trade based on new agreements will allow the world’s economies to expand and prosper. “But China and others no longer believe that,” Garten said. As trade, currency, countries’ economies, and other international indicators are all trending down “we are seeing a paradigm shift that discounts trade as an engine of global growth.”

The civil and economic weakness in China are dragging on economies around the world as commodity prices collapse, the U.S. manufacturing base hollows, its political system becomes more divisive, and explosive regions like the middle east and Africa become more chaotic. No country, including the United States, seems willing or able at this point to be a stabilizing influence.

China is wracked with civil unrest. On any given day there are riots over working conditions and persistent poverty, rural dislocation and urban pollution, Garten said. He visits China with his Yale graduate students frequently, he said, and is increasingly worried by conditions there.

“The government, burdened by increasing debt, is trying to shift from an export economy to a consumer and service-based one that taps the vast potential of its domestic markets,” he said. “I have my doubts they can pull off this huge transition, this economic restructuring, under the present government-directed system. There is more repression there today than ever.” At the same time, he said, “China is becoming more militaristic and will become more dangerous if things do not go well.”

And China is now too tightly connected with the rest of the world for metals industry executives to think their businesses will not be affected. “This is structural, not cyclical,” Garten cautioned. “It makes contingency planning, awareness of markets and your relationships with your customers all the more important. In this ongoing downturn you need to look for important ways to bind yourself to your customers, to be most useful to them with value-added services,” he said.

“We need a strong domestic economy to deal with all this,” Garten emphasized, “But we have taken our eye off the ball of the global economy, especially at a time when we need to be deeply involved. The question is can the next American president influence China? There is a good possibility that all this slow growth is a ‘new normal’. But it is certain that our domestic renewal must be tied to international leadership.”

Get more information on the global economic forces affecting metals at MSCI's Annual Meeting.