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Epidemic control workers guard a community gathering area under lockdown in Beijing, December 1, 2022, wearing PPE to prevent the spread of the novel coronavirus. Kevin Frayer/Getty Images
John Rapley is a writer and academic who lives in London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Britain fell into recession this week. The same goes for Japan, which lost its position as the world's third largest economy due to its severe economic decline.
It is becoming increasingly clear that the global economy is exhibiting some of the chronic weaknesses associated with the prolonged COVID-19 pandemic. The pandemic appears to have left deep scars on the economy, something few economists saw coming.
In fact, back in the early months of the pandemic, some people were holding their breath with excitement that a new Roaring Twenties would erupt once the lockdown was lifted. Central banks were pumping trillions of dollars into the financial system, and governments were providing trillions more in support to their citizens. Since there was little to consume while the economy was shut down, it was only natural that once the economy resumed, there would be a consumption storm and the economy would go on steroids.
But that didn't happen. Yes, there was an inevitable rebound once the lockdown was lifted. However, the world had changed so much during his century that a repeat of the 1920s was unthinkable. Instead, we'll see a big jump in 2022, and then he'll revert back to last year's average, which is his 10-year average. What's even more surprising is that the average value appears to be going down. Even if the global economy does get back on track, its trajectory will clearly slow.
Last month, the World Bank released its latest report on the global economic outlook. It painted a bleak picture of slowing growth and marked what they called a “miserable juncture.” The global economy is expected to grow at the slowest rate in 30 years, at 2.4% this year, but will likely improve slightly next year. As for all the money sitting on the sidelines, it's still sitting there. Investment is expected to grow at 3.7% a year, just half the average of the past decade, and low growth could become a permanent feature of the post-pandemic world.
Shortly thereafter, IMF published their own predictions. Although slightly more optimistic than the World Bank on growth, the fund echoed its partners' assessment. The basic problem is that of the three major drivers of the global economy – Europe, China and the US – only the last is doing as well as expected.
As I wrote recently, China is struggling, but Europe is in an even tougher situation. Outside of Eastern Europe, the continent's economy showed little movement last year, but European manufacturing is currently recession. According to the IMF's calculations, six of the 10 worst-performing countries in the global economy last year were among them. Canada continues to have good relations with Japan.
Among developed countries, the United States is the only bright spot, with the World Bank forecasting growth of 1.6% this year, following last year's 2.5%. But even that performance is underpinned by a huge increase in debt, so it deserves an asterisk next to it. If you subtract the money borrowed over the past few years from the economy's additional output, the U.S. will actually be set back.
The mistake made by those who imagined we would come back with a bang was to assume that the post-coronavirus economy would resemble the pre-coronavirus economy, just with more money flying around. . However, the pandemic has caused changes in global labor markets and supply chains, and the impact has been inflationary, particularly in aging societies in the West. Meanwhile, while the huge increase in debt has prevented economic collapse and asset prices from collapsing, it is also holding back the recovery.
Western governments are adding an average of a quarter of their GDP to debt, and most are now addressing problems that were worsening before the pandemic, such as housing shortages, aging infrastructure, and struggling health care. are reluctant to take on further debt to invest in system. Furthermore, much of the money injected into the financial system by central banks ended up fueling asset bubbles, from corporate bonds to cryptocurrencies to real estate. These bubbles are now an impediment to growth.
Therefore, it is telling that developing countries are the part of the global economy that has managed to shake off the pandemic and bounce back at full speed. With relatively little debt during the pandemic, both governments and the private sector have relatively more fiscal space to think big. Despite considerable variation, developing countries as a whole are faring reasonably well, with South Asia leading the way in terms of expected growth this year at 5.6%, followed by sub-Saharan Africa at 3.8%.
Putting all this together, the dynamism of the world economy is moving away from traditional growth poles. Old money may still be in the West and China, but new money will increasingly be made in the South.
