Economists project the world to go into a decade of slow growth. Tressis Gestion’s author and chief economist, Daniel Lacalle, say the global economy will likely suffer and see an unprecedented slowdown in the next few years.
According to experts, this prediction is totally possible considering the myriad of disasters that have happened in the past years, starting with the Covid-19 pandemic. Global economies have shut down because of lockdowns and quarantine protocols. Even with relaxed Covid measures, companies and other entities struggle to bounce back because of other factors. For example, Russia invaded Ukraine in February, affecting the global supply chain. Russia and Ukraine combined to supply a third of the world’s wheat. This only means that prices of other goods will soar.
Meanwhile, inflation in the United States and other global superpowers, like China and the UK, have worsened. Oil prices and other goods have increased, pressuring households, businesspeople, and the government. As a result, the International Monetary Fund reports that global GDP growth will falter to 2.7% in 2023 from 6% in 2021. According to the IMF, the projection is “the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the Covid-19 pandemic.”
“Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook,” said the IMF in a report.
“Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy,” it added.
“Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.”
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Global market lauds China
In a surprising decision, the Chinese government eased its Covid restrictions even amid a new surge of Covid cases in the country. The decision comes after the government of China received widespread criticism from its citizens and other global players. The recent pragmatic change in China could mean the end of its relentless zero-Covid policy that has gravely affected the country’s economy and, by extension, the global economy. Lacalle added that China reopening its economy to the international community is a positive factor that could revitalize markets in 2023.
“We have been looking at a very bleak picture for the Chinese economy, which is essential not just for the growth of the rest of the world but particularly for Latin America and also for Africa,” he said.
“The reopening of the Chinese economy is certainly going to give a significant boost to growth all over the world, but also — and I think it is a very important factor — German exporters, French exporters have felt the pinch of the lockdown and the weakening of the profit environment in China, and this is certainly going to help a lot.”
But Lacalle explained that China opening its economy does not mean that the growth rate will be the same as it was the years before the pandemic. A positive effect will come from the Chinese government’s decision, but slowing the global economy down is still highly likely.
“I think that we are probably going to move into a decade of very, very poor growth in which developed economies are going to find themselves lucky with 1% growth per annum if they are able to achieve it, and what is more unfortunate than everything else is with elevated levels of inflation,” he explained.
“I think that we are living the backlash of massive stimulus packages that were implemented in 2020 and 2021. That has not delivered the kind of potential growth that many economists expected.”
“I think that markets are starting to price that environment in which the situation globally is not of a buoyant level of growth and economic development, but [is] one that avoids a financial crisis, and if that happens, it is certainly positive.”
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The IMF report
The IMF emphasized other factors in its report, including global policies, outlook, and the labor market. The organization explained that the world’s economic outlook would depend on how governments modify their fiscal policies. Moreover, it would also be affected by the war between Russia and Ukraine and China’s growth rate.
“Risks remain unusually large: monetary policy could miscalculate the right stance to reduce inflation; diverging policy paths in the largest economies could exacerbate the US dollar’s appreciation; tightening global financing could trigger emerging market debt distress; and a worsening of China’s property sector crisis could undermine growth,” it adds.
“Policymakers should focus on restoring price stability and alleviating cost-of-living pressures. Multilateral cooperation remains necessary to fast-track the green energy transition and prevent fragmentation.”
Meanwhile, the organization also warned of wages and prices spiraling. When prices spike, people would need more budget. Hence, many unions have started efforts to call on companies to increase their salaries. Companies are pressured to oblige when this happens, forcing them to find other means to earn money to pay for their employees. As a result, some companies resort to price hikes and similar strategies.
“Analysis highlights that more backward-looking expectations require stronger and more frontloaded monetary tightening to reduce risks of inflation de-anchoring. Risks of a sustained wage-price spiral appear limited since underlying inflation shocks come from outside the labor market and monetary policy is tightening aggressively,” the IMF said.
Photo Credit: Elizabeth Shafiroff for Reuters