Dark clouds on economic horizon
Although global outlook seems gloomy, a slight variation from what the World Bank projects for China would positively affect developing countries
The prospects for the world economy for 2023 are challenging. The World Bank and the International Monetary Fund agree on the possibility of a slowdown but disagree on how deep the crisis will be. According to the latest Global Economic Prospects report released by the World Bank on Jan 10, the global economy is projected to grow by 1.7 percent in 2023 and 2.7 percent in 2024. The sharp downturn in growth is expected to be widespread, affecting 95 percent of advanced economies and nearly 70 percent of emerging and developing economies.
On Jan 12, IMF Managing Director Kristalina Georgieva said the organization will maintain its forecasts for global growth at 2.7 percent, as predicted in the IMF's October report.
Regarding deceleration, it is essential to mention the recessive impact of the ongoing inflationary process, which affects mainly the United States and the European Union. It is worth remembering that rising prices cannot be explained by a single factor, such as the Russia-Ukraine conflict, as that began in 2022, while the COVID-19 pandemic disorganized global value chains. However, the shock to the supply of food and energy that occurred from February 2022 potentiated the inflationary effects.
A direct consequence of inflation was the decrease in the aggregate demand of families, which began to spend more on food, electricity and fuel, and less on consumer durable goods and new properties. Inflation is behind the great social unrest in the United Kingdom, the European country most affected by the economic crisis. Brexit did not bring its population the economic benefits expected; instead it increased prices because of increased customs fees. The wave of workers' strikes in the UK can only be compared with the events of the early 1980s.
Inflationary growth is also reviving another economic problem characteristic of that time: the abrupt rise in interest rates on US debt securities, considered the most significant monetary contraction carried out by the Federal Reserve since the chairmanship of Paul Volcker between 1979 and 1987. Considering the dollar's central role in the international financial system, the increase in Treasury rates forces a generalized rise in global interest rates since other countries need to adjust their rates to compete for resources with the US.
One of the immediate effects of rising interest rates in the US is rising mortgage rates. It is worth considering that food and housing are part of the central core of the price index. Housing represents about one-third of the consumer price index. Specifically, the cost of housing, such as mortgage or rent payments, is often the most significant monthly expense for a family.
Two other factors have influenced the world economy's performance: geopolitical pressures and extreme weather events. Regarding geopolitical events, apart from the conflict in Ukraine, the actions the US initiated in 2018 to hinder access to industrialized goods from China in its market are worth mentioning. The widespread imposition of import tariffs has penalized bilateral trade and US household consumption and hurt Chinese producers. Equally harsh were the restrictions imposed by Washington on the sale of semiconductors to China and the protectionist policies that are redesigning economic globalization. The US is exchanging the logic of efficiency provided by globalization for the logic of domestic security, even if it means higher production costs. Lower integration means a lower global growth rate.
As regards extreme weather events, intense heat, forest fires, floods, hurricanes and typhoons, and heavy snowfall are becoming increasingly frequent, whether in the US, Australia, Pakistan or the Caribbean. In addition to harming the lives, climate events compromise public budgets and destroy productive capacity, worsening economic prospects worldwide. For example, the floods in Pakistan in 2022 affected 33 million people, and more than 1,730 people lost their lives. The World Bank estimates the total damages will exceed $14.9 billion, and the total economic losses will reach about $15.2 billion. Estimated needs for rehabilitation and reconstruction in a resilient way are at least $16.3 billion, not including much-needed new investments beyond the affected assets, to support Pakistan's adaptation to climate change and overall resilience to future climate shocks.
Considering all the previously-mentioned factors, it is necessary to think that the economic slowdown projected for 2023 affects countries unevenly. The World Bank projections indicate that for the US, growth is forecast to fall to 0.5 percent in 2023 — 1.9 percentage points below previous forecasts and the weakest performance outside of official recessions since 1970. Eurozone growth is expected at zero percent — a downward revision of 1.9 percentage points. China's growth is projected at 4.3 percent — 0.9 percentage points below forecasts. East Asia and the Pacific are cited for GDP increases to 4.3 percent. Europe and Central Asia are expected to grow slowly, by 0.1 percent. For Latin America and the Caribbean, growth is projected to slow to 1.3 percent. The Middle East and North Africa are expected to slow to 3.5 percent. For South Asia, it is projected to slow to 5.5 percent. Finally, sub-Saharan Africa is expected to grow at 3.6 percent.
Despite the World Bank's pessimistic projections for China, it is important to emphasize that the country's growth potential is being underestimated, especially if we consider the change in the policy to face COVID-19. Furthermore, unlike Western countries, China is less susceptible to US monetary policy and had the lowest inflation rate in 2022 among the G20 nations, with only 1.8 percent, while in the US, it was 6.5 percent and in Germany 8.6 percent. It is essential to pay attention to the performance of the Chinese GDP, as a variation above the World Bank projection can positively affect developing countries with a robust commercial relationship with China. A good China performance can help clear up the current gloomy horizon of the world economy.
The author is a professor of international political economy at Sao Paulo State University. The author contributed this article to China Watch, a think tank powered by China Daily.
The views do not necessarily reflect those of China Daily.
