Despite the global economic slowdown, some European countries and most major economies have managed to avoid recession this year. Image: Shutterstock
In retrospect, 2023 turned out to be quite different from what many observers expected at the beginning of the year from an economic perspective. As the year drew to a close, most people assumed the worst about what was to come. After all, financial markets had been hit hard the previous year, and there were signs that the United States, then and now the world’s largest economy, was heading for an ignominious recession.
But that did not happen. As the global economy slowed, most major economies managed to avoid recession this year, with the exception of some in Europe. Moreover, this resilience came despite the continued decline in several key drivers of international economic activity. For example, cross-border trade flows remain disappointing, with merchandise trade growth falling to just under 1% – about three times higher than in 2022 and well below the historical trend of the late 20th century. International debt is also projected to reach $307 trillion – more than three times the world’s GDP and $100 trillion higher than it was a decade ago (recall that this was in the aftermath of the global financial crisis).
Looking ahead to 2024, many analysts are now cautiously optimistic about the year ahead. Pricing pressures will recede everywhere, global inflation will fall to 7% from nearly 9% a year ago, and interest rates are likely to fall as inflation subsides. On the growth front, predictions include that the United States will achieve its fabled “soft landing,” avoiding a recession and economic slowdown despite one of the most aggressive rate-hiking cycles in recent years. Some expect China to solve its housing problems without triggering a collapse in its heavily real estate-dependent economy, while others expect European economies to pull themselves out of the doldrums. And India, the lone bright spot among major economies in 2023, will finally realize its long-awaited potential and assume its place as the next global growth engine.
While India’s story of belated rise certainly looks promising (especially after some of the policy fiascos early in the Modi administration, such as demonetisation and the failed rollout of GST), there are good reasons to be more cautious about the prospects for other major economies.
The U.S. economy’s continuing defiance of an inverted yield curve — a prediction that a recession will come when long-term interest rates fall below short-term interest rates — appears under greater threat than ever as the labor market shows increasing signs of weakness and the boost to consumer spending from stimulus checks issued during the pandemic finally appears to be running out.
The slowdown in China’s economy also seems inexorable. Indeed, even if China manages to sort out the downside caused by the housing market collapse, the momentum of the service sector expansion that briefly revived during the pandemic seems to have disappeared. Given the weakening forces of globalization, China’s vaunted export machine is unlikely to save the country this time around. And Xi Jinping’s government shows no signs of changing its aggressive intervention in the private sector, raising concerns that it may kill the goose that (so far) laid the golden eggs.
Also read: China’s economic reopening: How this year’s biggest investment theme went awry
The outlook for a strengthening Europe also looks bleak, at least in the short term. The burden of post-pandemic public debt burdens will continue to take a toll in the form of weakened private sector confidence. Also, the ongoing process of reducing fiscal spending, easing regulatory burdens and promoting regional integration will take some time before these structural reforms bear fruit. Even if inflation eases, it is unclear whether growth in the region will get back on track in 2024.
Unfortunately, forward-looking indicators such as the usually reliable Purchasing Managers’ Indexes (PMIs) do not paint a very encouraging picture. Developed economies in particular are all red, and major emerging markets (with India again being a bright spot) are not faring much better either. Supply chain issues have significantly reduced, helping to calm prices, but consumer and financial market inflation expectations remain skeptical and inflation may remain elevated, at least compared to the 2% inflation rates that many economies have become accustomed to over the past few decades.
All in all, we conclude that the coming year is likely to be a tame one, with most economies performing moderately and few growth breakthroughs in sight. However, there are some silver linings: inflation has subsided sufficiently that many central banks are likely to cut interest rates, providing much-needed relief to many financial markets, especially homeowners with mortgages. However, with still-weak fundamentals, it would be over the top to expect 2024 to be a stellar year for macroeconomic performance around the world.
Professor Jamus Jerome Lim is an Associate Professor of Economics at ESSEC Asia Pacific.
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