Macroscope | Falling FDI flows are yet another wake-up call about the health of the global economy

The stalling of FDI growth, the lifeblood of trade and economic activity, is another sign the global economy has swapped honest growth for a risky model based on excess liquidity, borrowing and consumption, making it vulnerable to risks such as the Wuhan coronavirus

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A construction worker at the site of a makeshift hospital being built in Wuhan to house coronavirus patients. A global economy suffering from stagnant investments and bloated stock markets is highly vulnerable to a systemic shock from a health crisis. Photo: Xinhua

Published: 7:00pm, 2 Feb 2020Updated: 7:35pm, 2 Feb 2020

The United States and China may have reached an uneasy trade war truce but collateral damage to the world economy from the conflict initiated by US President Donald Trump continues to spread. Among the latest casualties is foreign direct investment, the lifeblood of trade and economic activity.

The last people to care about this slowdown in long-term manufacturing and service sector investment are probably the shorter-term investors of stocks and shares, who are so high on liquidity-driven stock gains that they would not notice if they stepped into a minefield. But the rest of us should care.

Whatever the shortcomings of economic globalisation, it has raised the living standards of untold millions in both developed and developing countries alike, even if many others have lost out. This process relies especially on international flows of foreign direct investment.

Trade wars hit confidence in overseas investment while long-term capital flows shrink in the face of uncertainty. Thinking that this can be cured at the drop of a hat by an interim US-China trade agreement is naive in the extreme.

It is as though a bull (no prizes for guessing who) had rushed into a china shop, causing breakages and mayhem, and were then to glue a few pieces back together and declare business as usual, hoping no one would notice or care about the collateral damage.