The Global Economy: Resilience Amid Shocks and Divergent Futures

The world economy has faced a trio of formidable challenges, beginning with the COVID-19 pandemic, followed by the geopolitical turmoil due to Russia’s invasion of Ukraine, and a subsequent cost of living crisis. These events have collectively disrupted global economic stability, resulting in varied outcomes for different nations.

Growth Slowdown, Not a Stall

Despite these shocks, the global economy continues to grow, albeit at a pace below the long-term trend. While the current growth rate falls below the median of 3.4% since 1980, forecasts from the International Monetary Fund (IMF) indicate that the economy is not heading into a global recession. This resilience is evident in both developed and emerging markets.

Shaping Factors of the Economic Landscape

The recovery from the pandemic-induced service sector slump, aggressive interest rate hikes by central banks, and inflation driven by energy costs have been the primary factors shaping the current and future economic situation. Developed markets have seen a recovery in services, such as tourism, but rate hikes have placed a strain on mortgage borrowers and rate-sensitive sectors. Countries heavily reliant on imported energy, particularly from Russia, have suffered significant inflationary shocks, with secondary effects now influencing wage growth and services inflation.

Developed Markets: US and Europe Diverge

There is a noticeable divergence between the US, which has emerged robustly from the economic downturn, and Europe, where countries like France, the UK, and Germany are lagging. Federal Reserve Chairman Jerome Powell acknowledged the US economy’s strength, citing higher-than-expected growth and significant excess savings as factors contributing to this resilience.

UK’s Economic Outlook and Inflation Peaks

In contrast, the Bank of England’s Andrew Bailey painted a less optimistic picture for the UK, predicting flat GDP growth in 2024. Meanwhile, global inflation appears to have peaked around the summer of 2022, with core inflation, excluding volatile food and energy prices, remaining persistent due to service sector-driven wage inflation.

Emerging Economies: China’s Real Estate Slowdown

The largest emerging economy, China, is experiencing a severe slowdown in its real estate market, affecting not only its own economic prospects but also those of commodity-exporting countries. The impact extends beyond China, indicating the global significance of its property sector.

Economic Scarring and Long-term Impacts

The pandemic has left “scarring” on the global economy, with a noticeable deviation from pre-pandemic growth trends. Low-income developing countries and emerging markets have experienced the most significant negative impacts, with developed markets in the Euro Area also facing considerable scarring, unlike the minimally affected United States.

The Risks Ahead: Sticky Inflation and China’s Challenges

Risks to the global economy include persistently high inflation, particularly if labor markets remain tight, potentially requiring central banks to maintain higher interest rates for an extended period. China’s real estate woes could also pose a contagion risk if the government fails to manage the restructuring of developers and the funding gaps in local public finance.

Fiscal Policy Mistakes and Trade Fragmentation

Governments’ fiscal policy decisions during the pandemic and their potential continuation could fuel further inflation, with the United States highlighted as a country not cutting back on pandemic-era spending. Additionally, trade fragmentation, exacerbated by geopolitical tensions, is another inflationary risk, limiting the supply of commodities and goods.

Bottom-line: The global economy’s outlook is a complex tapestry of resilience, divergence, and potential risks. While some economies, notably the United States, have shown strong labor markets and growth, others like the European Union and China face distinct challenges. Core inflation remains a concern, and geopolitical risks threaten to disrupt trade further. For investors, a cautious approach may be prudent, with a preference for more insulated markets like the US, while remaining wary of emerging markets and European economies, pending the accuracy of current economic forecasts.