In early 2024, the World Bank issued a bleak message in its flagship report, the World Economic Outlook. This year could end with a “devastating juncture of the weakest global economic growth in five years since the 1990s.”
From 2021 to 2023, when the global economy showed signs of recovering from the pandemic trough, growth rates have slowed almost everywhere, with global growth at 6.2% in 2021, 2022, 2022 and 2022. , 3.0%, and 2.6%. Each is until 2023 (Figure 1). In most developed countries, growth rates in 2023 were below the average recorded in the decade from 2010 to 2019, and the United States was on the verge of surpassing that number.
The 2010-2019 numbers are important because they capture the long-term effects of the prolonged Great Recession that followed the 2008 financial crisis in developed countries. After overcoming the pandemic, the world appears to be returning to a recessionary environment.
When the economic recovery began in 2021, the concern was not about slowing growth but about inflation. The consumer price index has started rising from the extremely low levels of the pandemic year. This was driven by the fact that while the fiscal response to the pandemic recession supported spending, supply disruptions took longer to ease (Exhibit 2).
However, even before the gradual correction of this imbalance brought price inflation under control, speculation in commodity markets, especially fuel and food markets, following the outbreak of war in Ukraine in February 2022 gave new impetus to prices. .
However, as it became clear that there was sufficient supply in the global market, inflation moved further away from its peak level in the third quarter of 2022, dispelling that speculation. Unsurprisingly, a slowing rise in commodity prices underlies the overall decline. Inflation rates in developed countries (Chart 3).
However, the tendency for inflation to recede can be attributed to the central banks of developed countries taking monetary responses to inflation by repeatedly raising interest rates. In fact, inflation peaked long before policy rates peaked.
In the United States, for example, the federal funds rate has only been raised to 3.1% by October 2022 from a low of 0.08% in February. It was during the following months, when consumer price inflation was falling rapidly, that the Fed rate was raised to a peak of 5.33 in August 2023.
interest rate hike
However, since the gradual rise in prices coincides with the rate hikes from August 2022 onwards, there is a view that the Fed's rate hikes are responsible for the Fed's success in curbing inflation.
This assessment was accompanied by the assumption that a collateral consequence of rate hikes targeting inflation would be a slowdown in GDP growth. The post-pandemic drop in global growth to pre-pandemic lows was read as a necessary sacrifice to rein in inflation.
It is therefore argued that growth will return the moment central bankers begin to ease high interest rate policies, now that inflation is under control and interest rates can be lowered again.
What this ignores is the fact that years of low and near-zero interest rates from late 2008 to early 2022 prevented developed economies from emerging from the low-growth syndrome that followed the 2008 financial collapse. be.
A more plausible explanation for this long-term growth performance can be found in changes in fiscal policy. Unlike the long-term adherence to unconventional monetary policies that governments in developed countries have adopted, reliance on active fiscal policy is far more unstable.
Indeed, an aggressive fiscal stance was adopted in response to both the 2008 crisis and the sudden halt in economic activity due to the 2020 pandemic.
However, in both cases, fiscal hawks argue that either inflation or a recession caused by too high a public debt-to-GDP ratio, despite the far-from-solid basis of theoretical and empirical arguments. This aggressive fiscal stance was quickly reversed.
The consequences of this erratic fiscal behavior are reflected, for example, in recent growth performance. The growth recovery in 2021 was undoubtedly led by the massive fiscal stimulus measures taken by governments in response to the collapse in growth in 2020.
fiscal stimulus
In 2020, net government savings or deficit spending as a percentage of GDP was the same in France (2.1% to 7.7%), Japan (2.3% to 8%), the United Kingdom (0.9% to 10.4%), and the United States (5.9% to 10.4%). It increased rapidly. 13.9%). This must have undoubtedly contributed to reversing the collapse in GDP, even if it contributed to the imbalance between demand and supply recovery that pushed up prices (Exhibit 4).
However, the situation hardly began to stabilize when the government chose to withdraw stimulus, and deficit spending fell significantly in 2021 and 2022. Unsurprisingly, growth stalled so much that the post-COVID-19 recovery lost momentum fairly quickly. Global growth, which recovered to 6.2% in 2020, has declined to an estimated 2.6% in 2023.
Given the fiscal conservatism that grips governments in a finance-dominated world, there is no evidence that a return to aggressive spending to boost growth is likely. All bets are being made that interest rate cuts are likely to occur after inflation subsides.
structural factors
There are structural factors that impede a return to high growth in developed market economies. However, if the current low growth over the medium term is not to continue, it is necessary to recognize the importance of countercyclical fiscal policy in the macroeconomic management of a capitalist economy.
Given the large amount of untapped labor and spare capacity around the world, such policies are recommended as a response to the current economic slowdown. Germany is the only economy where policymakers have abandoned fiscal activism during the pandemic. Governments have failed to take advantage of the fiscal space they have given for emergency measures, and now find themselves unable to use that money to fight climate change.
Not surprisingly, Germany, long Europe's growth leader, is today the worst performer.
Maintaining an aggressive fiscal stance requires two other efforts. One is to directly curb speculative price increases caused by conglomerates in production and trade, especially by limiting and rolling back the power of monopolies. The other is to finance spending by taxing the large surpluses that these countries' wealthy people increasingly own. It is true that public expenditures can be financed by borrowing, but ultimately they must be financed with own funds.
The aggressive fiscal policies adopted in Western countries after the pandemic crises of 2008 and 2020 were quickly reversed due to concerns about rising inflation and high public debt, which affected growth.
