The last time I wrote about the global economy, I wrote about its fractious state, thanks to the geopolitical tensions all around. This time, I thought I would look at it from the multilateral institutions’ point of view and then share my own thoughts on where the global economy might be headed.
As I write this in Goa, the IMF and the World Bank have concluded their annual meetings in Marrakech, the site of a terrible earthquake just over a month ago. Let me start by saying that 2023 is not yet the year of severe global slowdown and even recession that many thought parts of the world economy might see. Even if most countries are managing to eke out some growth, despite the Ukraine crisis still raging and inflation still at very high levels, the global economy is slowing. No doubt about this.
The focus of the annual meetings 2023 at Marrakech seems to be on achieving economic growth while also reducing poverty. The attention on SDGs (sustainable development goals) and poverty reduction is good, because the world had largely taken its eyes off this, during the three years of the Covid-19 pandemic. Then, all the attention was focused on controlling the pandemic, vaccinating billions around the world and on reviving economies that had almost ground to a halt. Post the initial recovery there was the problem of soaring inflation, resulting from huge pent-up demand and supply shocks, which then gave way to more general inflation resulting from strong consumption demand and high energy prices which had filtered through to most goods and services.
Well, high inflation has still not gone away and central banks are still in the process of tightening liquidity and raising interest rates. The question is how much longer will they have to raise interest rates and will it hurt the economic recovery that is taking place albeit slowly. According to IMF’s World Economic Outlook October 2023 edition released at the meetings, growth for most major economies is projected to be not very much lower than 2022, which suggests that growth is indeed slightly better than previously thought, albeit slower. This is especially true of emerging and developing economies in Asia as well as countries in Africa. This is good news. However, their overview keeps comparing countries’ 2023 GDP with those of pre-pandemic levels, and IMF is of the view that global GDP will be 3.4% lower than before the pandemic and is now expected to grow by 3% in 2023 as compared to their previous forecast of 3.5%.
IMF’s more important observation to consider is that output, consumption and labour are all showing regional divergences, with different economic regions growing at different speeds. This is something I had anticipated and written about before on my blog, so it doesn’t come as a complete surprise. In fact, we should have expected it. Advanced economies are growing stronger, though Euro area countries are experiencing weak recovery and growth. And emerging and developing economies although growing at a faster rate are more vulnerable to external shocks, while low income developing countries are the weakest and are also under huge debt distress. One had hoped that China’s reopening after the zero-Covid lockdowns would be strong and would provide a boost to the rest of the world as well. That has not borne out and instead we are seeing very weak economic growth, coupled with slowing consumption demand and low to no consumer price inflation. IMF thinks that its mainly to do with China’s real estate sector’s debt problems and private investment as well as consumption being dampened as a result. Low income developing countries’ 2023 GDP is likely to be 6.5% below pre-pandemic levels, and their debt levels are enormous with interest payments at 14-15% of revenue receipts.
Global trade has also slowed significantly and is expected to grow only by 0.9%, while earlier estimates were for 1.7%. Thankfully, some countries such as India, China and Brazil have large domestic markets to serve and can therefore weather out the global slowdown in trade.
The other important observation by IMF is that business investment continues to be uniformly weak across all regions of the world. This not very encouraging news, and although governments across the world have been putting forward plans, legislations and incentives to boost investment, many of those might take a few years to take hold. It is a fact that governments have gotten bigger during the pandemic and have done the bulk of the spending and investment in order to keep consumption and investment buoyant. Now it remains to be seen if private investment can pick up in creating new capacity, but that depends on how strong employment, wage growth and consumption demand are.
The IMF estimates that around 75-95 million more people are living in extreme poverty around the world compared to pre-pandemic levels. This, coupled with the fact they are the most vulnerable to shocks from climate change, makes it imperative that action on climate change doesn’t slow down any more than it already has. Thanks to the war in Ukraine and the energy crisis, fossil fuel consumption subsidies has grown significantly according to the IEA. Though investment in clean energy production has grown over fossil fuels during the past decade, much more needs to be done.
We now also have the spectre of war in the Middle-East sparked off by Hamas’ attacks on Israel early this month and it threatens to widen into a larger regional conflagration. One hopes the international community, especially the UN Security Council will call on all sides to call off strikes and announce a ceasefire. I am surprised that everyone is only expressing support for one side or the other; nobody has actually asked for the violence and bloodletting to stop. Despite the UN’s calls for humanitarian aid and assistance to be allowed to reach Gaza, Israel in open defiance of the UN and all international laws is threatening a complete siege of Gaza and has asked for it to be evacuated! Economically it is going to mean that energy prices will stay higher, and trade too will be disrupted thanks to the Suez-canal area being affected.
At a time like this, it makes sense to consider the reform of MDBs that the G20 expert panel led by Larry Summers and NK Singh have recommended. The second volume of their recommendations report is to be presented and discussed at the Annual World Bank Group meetings in Morocco. The idea is to expand the capital base of MDBs, including by inviting private capital, so that the lending capacity of these multilateral financial institutions can increase commensurate with the needs of poor and developing countries as well as combating climate change.
The World Bank too has released its regional economic updates for the various economic regions of the world. From the few I read, it appears that the World Bank is prescribing growth paths for these economic regions as they try to recover from the effects of the pandemic, including high inflation. I am not sure I agree with this approach, as each region ought to try and diversify its economy in order to achieve broad-based economic growth. For example, the World Bank has recommended that East Asia and Pacific region diversify into services as they have been mostly manufacturing-led. And that South Asia focus on climate change and clean energy transition.
I think it would be more helpful to view economic recovery and growth in terms of time horizons, immediate and near-term, medium-term and long-term. Right now, the concern of most economies is to recover from the effects of the pandemic and high inflation, in order to grow at a slightly faster pace. If East Asia is growing at a reasonably good pace, thanks to manufacturing as well as services growth mainly from tourism, so is southern Europe growing thanks to revival of tourism. However, as the IMF forecasts, growth from the services sector, especially tourism, will moderate soon and countries ought to be prepared for this. East Asia is already well on its way to becoming services-led, what with its technology industry, high mobile internet connectivity, Web 3.0 and industrialization 4.0. Some countries such as Vietnam, Cambodia, Thailand and Laos have yet to catch up, and the Pacific islands are too small to consider yet, but the rest of the region is highly advanced in digital tech, internet services and connectivity, in part thanks to connections with China. Southern Europe got a good boost to economic growth in 2022 and this year from the revival in tourism, but it needs to diversify its economy beyond this industry in order to become more competitive.
By looking at economic growth through time horizons, I also mean that we pay attention to the cyclical recovery and growth, while at the same time plan for structural reforms that will drive further growth over the secular longer term. Here are a few of the concerns that I have regarding many economies and these require immediate consideration in my view:
- Whether advanced economies can afford to maintain such high government spending and entitlements, as their working population ages
- Whether major European economies can depend on external demand alone, even as they make their economies more competitive
- If China can reduce its dependence on infrastructure-led growth – which includes real estate in their case – and focus on private consumption even as its population ages
- Whether India can become more competitive as an economy and create enough employment and domestic consumption and investment as will be required to reduce poverty and inequality.
These are the questions that ought to occupy our minds over the next few months and years. And of course, on climate change, we ought not to allow the energy crises resulting from the wars to throw our NDC commitments off-course. We must maintain the momentum on it, as I have written in my Owleye column this month, and aim to achieve more agreement on climate finance at the COP28 summit in Dubai next month. And all countries, not merely South Asia as the World Bank has suggested, ought to try and meet their emission reduction targets; India, China, Japan, Indonesia, South Korea and Australia are all significant emitters in this region of Asia alone, and need to do better.
Countries also need to keep a watch on their fiscal condition and debt levels that had mounted during the pandemic years. As I have written before on my blog, it won’t be long before governments will have to consider fiscal policy decisions in order to help central banks’ actions in bringing down inflation, and also reduce borrowings and deficit financing. The IMF says it doesn’t see governments’ fiscal policy as being expansionary, and I think they ought to start consolidating their public financial position. This, while at the same time bringing down debt levels, which as they say is above 80% for many major economies.
Finally, of course, we can expect inflation to reach central banks’ targets only sometime in 2025, the IMF says. That means interest rates and cost of capital will stay high until then and this might dampen private investment sentiment further. Large corporations will still be able to raise money through corporate bonds and equities. It’s the smaller and medium sized businesses that governments must ensure are supplied with adequate bank credit.
We will probably end 2023 with slightly better growth than earlier expected. And it’s 2024, or FY25, that is likely to be the year of global slowdown. And since next year is also a year of elections in important economies of US, UK and India, we can expect more promises and sops from our politicians. Hopefully, that will not fuel inflation or aggravate the fiscal deficits beyond the already high levels.
Meanwhile, I think the rebalancing of the global economy will continue. From manufacturing led growth in 2021-22, to services recovery and revival in 2022-23, to more broad-based economic growth on an even keel, from here on.
Note:
I would recommend that readers listen to the following discussion from Brookings Institution, especially the presentation by Ahyan Kose, to realise the extent of global economic slowdown that is due to restrictive policies by governments.
If you read the executive summary of IMF’s World Economic Outlook October 2023, because you don’t have time to read the entire report, don’t be surprised if it reads like an introduction to a book or a report. It is not an executive summary, in my opinion.
Peripatetic Perch 