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Central banks have embarked on monetary austerity measures to curb inflation. From bond markets to commercial real estate to the health of banks, there are always concerns about the financial system. Roughly 4 billion people will head to the polls this year, and the results are unpredictable. Most worryingly, the world is aflame with conflicts from Ukraine to Israel to the Red Sea. Other wars, especially those on Taiwan, don't feel so far away. No wonder analysts talk about a “polycrisis,” a “hell picture,” and a “new world anarchy.”
But at least for now, the global economy is laughing in the face of these horrors. At the beginning of 2023, nearly all economists were predicting a global recession that year. Instead, global GDP grew by about 3%. Early signs suggest progress continues at the same pace this year. Data from the bank Goldman Sachs shows that global economic activity is about as strong as in 2019. Similar results were found in weekly GDP measurements produced by the OECD, a club of mostly rich countries. Additionally, global activity indicators derived from surveys of purchasing managers (so-called PMI data) show strong growth around the world.
The labor market is even stronger. The unemployment rate across the OECD remains well below 5%. The proportion of people of working age who are actually employed, a better measure of the strength of the labor market, is at an all-time high. A healthy job market is boosting household budgets hit by inflation. Real household disposable income across the G7 fell by 4% in 2022, but is now rising again.
Certainly, some countries are not doing well. China's economic growth rate remains disappointing. Some people from Europe have concerns. Germany is facing the effects of recent energy price hikes and competition in the auto industry from China's electric vehicle exports, which could push it into recession. But there are also more powerful signs. U.S. nonfarm payrolls rose by a total of 353,000 jobs in January, an astonishing number that exceeded almost all expectations. The latest PMI data is a bright spot for Brazil, which has faced years of low growth.
So far, there doesn't seem to be much evidence that attacks on Red Sea ships are upending the economy. PMI data suggests manufacturers are facing longer delivery times. This coincides with the rerouting of ships around the Cape of Good Hope, which will increase the range between Shanghai and Rotterdam from 18,000 kilometers to 23,000 kilometers. However, in almost every economy, shipping costs are only a small portion of the total price of an item. Even the most pessimistic nerds believe that inflation is trending upward because of the Red Sea turmoil, but this is just a rounding error.
Why is the global economy so unaware of the new global turmoil? Thanks to high interest rates, the rich world has managed to bring inflation down from a peak of more than 10% to around 6%. This not only increases household purchasing power; It also lifts their spirits. In fact, consumer confidence among the wealthy, which hit a record low in 2022, has risen sharply. Rising borrowing costs are constrained by the fact that many household and corporate debts have fixed interest rates.
There are also more interesting possibilities. After so many shocking global developments, the world no longer cares about chaos as much as it once did. This is consistent with academic evidence, including a recent paper by two Federal Reserve Board researchers, that suggests the hit to production from heightened economic uncertainty fades after a few months.
Leading economists remain cautious. Rising interest rates could slow the impact on growth. An escalation of the Russia-Ukraine war or the Red Sea war could cause further shocks to energy supplies and lead to inflation. If Xi Jinping decides to make a move regarding Taiwan, all bets are off. But on the other hand, lower inflation and the potential for increased productivity through generative artificial intelligence could help accelerate GDP. Moreover, the global economy has already demonstrated its resilience. Polycrisis, what kind of polycrisis? â–
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