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There is a swirl of uncertainty surrounding the global economic outlook for 2024. The reasons for such an uncertainty include the failure of global economy to recover from the effect of the pandemic, the continuing Russia-Ukraine conflict, Israeli invasion of Gaza (where by the end of last week more than 17,000 Palestinians were killed), the cost of living crisis, and above all deepening crisis faced by the global financial system amid fears that one or the other or a combination of ongoing inflation, rising interest rates, growing public debt could set off a major global financial crisis.

 

Furthermore, economic crises have been destabilising political and social conditions. We have seen over the last decade or so sharp increases in political polarisation and the rise of populist movements on the extreme right in Europe, the United States and India. We are also witnessing a rising trend in income inequality which is turning into a crisis. Rising income inequality is not just an economic problem but also a social and political problem. Economic policy prescriptions are much more than just about achieving economic efficiency. They fundamentally also require fairness.

There are concerns about rising interest rates in 2023 and that could lead to delinquency and debt default across several loan categories. Rising geopolitical risk as reflected in the Russia-Ukraine conflict and the Israeli invasion of Gaza could push up oil prices, thus inflation as well. Deutsche Bank chief executive officer (CEO) said, “My biggest fear is there’s one more geopolitical escalation and there’s a market event” at a bankers’ conference held last month in Hong Kong. The OECD Economic Outlook published last month (November 2023) warned that the world economy is confronting new risks resulting from heightened geopolitical tensions amid the Israel-Hamas war – “particularly if the conflict were to broaden.”

But according to an IMF Blog (October 10, 2023) the global economy has displayed remarkable resilience despite war disrupted energy and food markets and unprecedented monetary tightening to combat decades-high inflation. The blog further adds that economic activity slowed but not stalled, growth remains slow and uneven, with widening divergence.

According to the IMF projections, headline inflation will decline from 5.9 per cent this year to 4.8 per cent in 2024. But the core, which excludes food and energy prices, will decline to 4.5 per cent. Global economic growth will slow from 3 per cent this year to 2.9 per cent in 2024, just a mere 0.1 percentage point decline.

The OECD report also mentioned that the global economy has proved surprisingly resilient this year but is expected to falter next year under the strain of war. It estimates that global growth would slow to 2.7 per cent in 2024 from an expected 2.9 per cent this year. This would amount to the slowest calendar-year growth since the pandemic year growth of 2020. OECD Secretary General Mathias Corman said at a press conference that despite gloomier outlook, the OECD is “projecting that recession will be avoided almost everywhere.”

He, however, further added that while headline inflation has continued to come down in many countries, but core inflation — inflation excluding the most volatile components, energy and food — has not significantly slowed. It remains well above central banks’ targets. So, there are risks that inflation will stay persistently higher than expected.

According to the OECD the US economy is forecast to expand just 1.5 per cent in 2024 from 2.4 per cent this year as the Federal Reserve’s (the Fed) interest rate increases — 11 times since march 2022 — continue to restrain growth.

The Federal Reserve Bank of St. Louis in its latest report also forecast that real GDP growth in the US to slow sharply in 2024 but remains positive. While the inflation pressures continue to ease, personal consumption expenditure (PCE) inflation remains above the Fed’s 2 per cent target. The report further adds that the core CPI, believing to be a better indicator of future inflation, was up by 4 per cent in October from a year earlier, a reading that has been consistently above since June 2021. Overall economic conditions in the US are expected to deteriorate modestly, but real GDP growth is expected to remain positive, and inflation is expected to decline to around 2 per cent.

As for China, the OECD forecasts that the Chinese economy will expand by 4.7 per cent in 2024, down from 5.2 per cent this year. The report further adds that China’s “consumption growth will likely remain subdued due to increased precautionary savings, gloomier prospects for employment creation and heightened uncertainty.”

OECD in its report also said, “Growth has been stronger than expected so far in 2023 but is now moderating as the impact of tighter financial conditions, weak trade growth and lower business and consumer confidence is increasingly felt.”

It appears that there is a consensus emerging that central banks in advanced economies are nearing the end of a long journey to raise interest rates. This tightening of monetary policy has fueled increased volatility in financial markets. A conference of global bankers held early last month in Hong Kong on how to deal with the increasing complexities of the global financial system had ended up in focusing on the deep crisis facing the financial system, especially on the “shadow banking” sector which involves lending by hedge fund and private equity groups.

Shadow banking operating outside the financial regulatory system had had a phenomenal growth since the 2007-2008 Global Financial Crisis (GFC). Shadow banking now accounts for about half of the global financial assets. One banking executive clearly indicated that when the next crisis happens, it will be in this sector. Such a crisis will cause a crisis of confidence and that rapidly will move from shadow banking system to the broader financial system. This will have serious consequences for the global economy.

Global public and private debt have dramatically risen during the last two decades and it represents an important concern for the world economy since this may pose serious threat to macroeconomic, financial, and fiscal stability, which in turn can amplify uncertainty among economic actors. High debt may hinder economic growth, especially for those economies with a large debt burden, and it may also amplify the volatility of GDP growth rates.

According to the IMF, global public debt tripled since the mid-1970s to reach 92 per cent of GDP (or just above $91 trillion) by the end of 2022. Private debt also tripled to 146 per cent of GDP (or close to $144 trillion), but over a longer time span between 1960 and 2022. It is estimated that the interest bill for G7 countries was US$905 billion a year in 2018, and it would rise to US$1.5 trillion by 2026.

There are now growing concerns relating the growth of US government debt refinancing because of the contraction in the capacity of financial markets to buy treasury bonds. However, the US government has the option to use its taxation power or inflating away the debt, both or either one of them are not definitely on the US government’s prescription list. Also, there is no prospect for the US economy to grow its way out of the mounting debt problem as the economy is forecast to grow only 1.5 per cent in 2024.

A slowdown in economic growth will certainly create an unfavourable environment for trade. Also, as the world has gone past the peak of globalisation that has been putting downward pressure on global trade growth. Global economic growth will certainly be less than this year’s as central banks are aiming at inducing a slowdown to regain control over inflation and that will negatively impact on trade.

In fact, what we are witnessing now is the process of deglobalisation as reflected in declining trade/global GDP ratio which declined from 25 per cent in 2008 to 20 per cent in 2020. We are also experiencing the after-effect of deglobalisation-increased inflation systematically.

In a climate of lower growth, higher interest rates and reduced fiscal space, structural reforms along with increased productivity will help achieve longer term growth. A key area to further stimulate economic activity and a very important source of long-term prosperity for all countries – developed and developing — is trade. Therefore, countries must refrain from implementing policies that contravene WTO rules using the pretext to safeguard economic security which distort the flow of trade.

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