Global Economic Recovery- Need to return to fundamentals
The world economy faced several crises in 2022 that highlighted the need for more balanced development. Although the COVID-19 outbreak was still felt globally, the conflict in Ukraine affected the food and energy markets, causing severe malnutrition and shortages in many developing nations, as well as an increase in hunger. Due to the rising cost of living, many people have become impoverished. The global warming crisis is also contributing to the development of humanitarian crises. Various factors are expected to affect the global economy in the coming years, such as rising interest rates and inflation. This could cause developing countries' financial conditions to become unstable.
On account of the rising level of private and public debt, the financing conditions have become more difficult. This has led to higher debt service costs and reduced the available fiscal space. Rising interest rates have also affected the consumer confidence and investor sentiment. The conflict in Ukraine and the supply chain issues have caused the global trade to slow down. In May 2022, the World Economic Outlook predicted that the world economy would grow by around 3.0 percent. However, it has been lowered to a prediction of 1.9 percent. It is the lowest rate in three decades. Recently, the World Economic Outlook projects that the global economy will grow at a rate of around 2.7 percent in 2024. The recovery is expected to begin in the next couple of years, and the decline in inflation will allow central banks to lower their interest rates.
The outlook for the world economy is still unclear due to various factors.
· The decline in developed countries has been considered one of the factors that have affected the world economy.
· In 2023, many developed and emerging nations are expected to experience a recession. The growth of advanced economies has started to wane, especially in the United States and the European Union.
· Rising interest rates are expected to cause people to reduce their spending. Moreover, the rising mortgage rates could cause another decline in housing markets.
· The conflict in Ukraine has affected Europe's short-term economic outlook. Economic indicators are expected to reveal a mild recession, as rising energy costs and tighter financial conditions are expected to result in a decrease in consumer spending.
· The situation in Ukraine also affected the economic outlooks of other countries in Europe, such as Georgia. The economic decline in Russia has also caused spillover effects.
· In spite of the economic decline that occurred in Russia, the country was still able to grow at a rate of around 3 percent in 2022 due to the stabilization of its financial industry and the country's strong current account surplus.
· It is expected that the European Union will grow by about 0.1 percent in 2023. In 2022, it was predicted that the region's economy would grow by 3.2 per cent. However, due to the disruption of the energy and gas supplies, it is now believed that the economy will shrink.
· The UK's economy is expected to take a hit due to the effects of the country's exit from the European Union. This will cause household spending to decrease and the country to experience a recession.
· Despite experiencing moderate growth in the previous year, the Japanese economy is expected to grow at a steady rate of around 2.0 percent in 2023. The manufacturing sector is expected to be negatively affected by the shortages of chips and rising prices of imported goods. But, unlike other advanced economies, the country still has accommodative monetary and fiscal policies.
· The recovery of the energy exporters' industry was also supported by improved trade terms. The aggregate gross domestic product of the CIS and Georgia is expected to decrease by around 1 percent in 2023.
The economic outlook for developing regions is expected to worsen.
In 2023, China's economic growth is expected to reach a rate of 4.8 percent, which is slower than its previous prediction of 5 percent. The country's growth was affected by the effects of the real estate crisis and the COVID-19 lockdown. It is now believed that its economy will regain its strength after the government decided to end its zero-carbon policy. Coming back from the pandemic is going to be difficult, as it is expected to be below pre-crisis levels of around 6.5 percent. Besides that, East Asia's economy is predicted to grow at an annual rate of around 4.4 percent in 2023, which is slower than the China's recovery. Various factors, such as the rising cost of food and the fading demand for certain commodities, are expected to affect the region's economic development.
The recovery is anticipated to be supported by the implementation of monetary and fiscal policies to contain inflation, as well as the global financial conditions. However, the rise of COVID-19 could cause negative spillover effects. Rising food and energy prices are expected to have a negative impact on South Asia's economy. It is currently expected that the region's gross domestic product will grow at a moderate rate of around 4.8 percent in 2023. Although India's economy is expected to continue growing at a steady rate of 5.8 percent, its growth rate is expected to be lower than its previous estimate due to the rising interest rates and the global economic slowdown. In fact, even after seeing the positive effects of the recovery in Western Asia, the region's non-oil sectors are expected to experience a weak recovery. This is due to the implementation of international financial restrictions and the severe fiscal situation.
The economic growth of Africa is expected to continue to be subdued due to the volatility of the global economy and domestic factors. Various factors, including the rising cost of energy and food, have affected the continent's development. Moreover, due to the rising costs of debt, many governments have started turning to bilateral and multilateral support. It is estimated that the country's economic growth will decrease from an expected 4.1 percent to 3.8 percent during the next few years.
The economic outlook for Latin America and the Caribbean is expected to remain negative due to the various factors affecting their economies. It is estimated that their growth rate will decrease from an estimated 4.8 percent to 1.4 percent in 2022 and 2023, respectively. The labor market is expected to remain weak, and efforts to reduce poverty in the region are unlikely to materialize anytime soon. Some of the major economies in the region such as Argentina, Brazil, and Mexico are expected to experience slower growth rates due to tighter financial conditions and domestic vulnerabilities and several factors are expected to affect the economies.
When policymakers make decisions, they often have to consider the various trade-offs that must be made in order for them to support a resilient recovery and avoid a deeper recession. They have to balance the need to boost the economy with the control of inflation. Making policy mistakes can have significant consequences, such as undermining the well-being of the population and increasing the likelihood of a recession. It can have significant consequences, such as undermining the well-being of the population and increasing the likelihood of a recession.
The global economy has undergone significant changes over the past couple of years. As a result, policymakers have to consider the various implications of their decisions when it comes to managing monetary policy. In 2022, major central banks such as the US Federal Reserve and the European Central Bank started to increase their interest rates. In response to which, central banks are currently in a critical juncture due to the global economy's slowdown. The rapid pace at which liquidity has been withdrawn from the financial system has led to negative spill-overs, which have affected the economies of several vulnerable nations. If the global economy is unable to adapt to the rapid pace of normalization of monetary policy, it could experience a severe slowdown. This can be avoided by the central banks if they take into account the effects of their rate hikes on other sectors of the business.
It is essential to avoid implementing budgetary stiffness.
Despite the global economy's recovery from the COVID-19 crisis, the need for fiscal consolidation is still on the horizon. Unfortunately, implementing austerity measures at this time could have very detrimental effects on the well-being of certain groups, such as women and children. One of the most common effects of budget cuts is the elimination or reduction of social services and education programs that help women, which can lead to higher risks of going into poverty. These cuts would also affect the unemployed and those still looking for a job. Implementing austerity measures too soon could have detrimental effects on the global economy and its support for sustainable development. It can also delay the fight to combat climate change and prevent nations from receiving vital financial support. As well as, the rising cost of debt and the slow growth of the global economy are the main factors that are affecting developing countries' economies. If the government's efforts to implement fiscal consolidation are not carried out properly, it could lead to a prolonged recession.
Proper use of public funds can help support development and growth. Unfortunately, despite the recovery, the actual output in developing nations is still below its potential. This indicates that there is still a lot of economic slack. But, public investments can stimulate the global economic recovery by creating jobs, lifting the nation's growth, and increasing private sector output. These can also help companies expand their operations and contribute to new industries. These investments can help address various factors that threaten the global economy. For instance, they can help developing countries manage their scarce resources and improve their productivity. Developing countries can address their fiscal issues by implementing proper management of their public expenditures.
In response to the growing concerns about the global economy, the UN Secretary-General has proposed a stimulus package that would provide developing countries with a boost to their economic performance. It would also increase the amount of resources that the global community would give to support sustainable growth. Together, developing nations can address their fiscal problems and contribute to the global economy's growth. Owing to the various global crises and the increasing number of countries testing the limits of their multilateral frameworks, it is now more important than ever for the global community to work together to resolve these issues. As the global economy nears the halfway mark of its Sustainable Development Goals, it is crucial that the community acts now to ensure that the goals are met. According to various estimates by the World Bank, the amount of resources the global community will give to developing nations to support their efforts to achieve these goals and combat climate change will reach trillion dollars annually. Even if certain actions taken by a country can have a beneficial effect on the environment, other nations can still benefit from favorable results. This is the reason why it is crucial that the global and local communities work together to increase their resources to support sustainable progress.
Conclusion
The goal of most economies is to achieve a sustained reduction in global inflation. This can be achieved through the establishment of a neutral policy stance and raising real interest rates. Doing so would help prevent inflation expectations from becoming deanchored. While the establishment of a clear and consistent communication channel between the central bank and the public will help maintain the appropriate level of inflation expectations. In addition, the removal of balance sheets will help prevent market liquidity risks from undermining the effectiveness of monetary policy.
In countries where inflation is in check and output is expected to remain below potential, maintaining accommodative policies may be appropriate. To contain the spread of COVID-19, countries must work together to improve the availability of vaccines and medicines, as well as deploy various measures to improve pandemic preparedness. Like, in China, it is important that the government and private sectors work together to improve the availability of vaccines and medicines, as well as maintain high coverage of antivirals and booster drugs. Doing so can help prevent the spread of the virus and safeguard the recovery.
In countries where financial stability is at risk, implementing macroprudential tools can help address these issues. For instance, conducting stress tests in areas with rising house prices is necessary. The government of China is focused on addressing the property crisis and preventing the spillovers of economic and financial risks. It is also working to strengthen measures to protect pre-sale homebuyers and stabilize the distressed developers. Despite the various regulations that have been implemented globally since the financial crisis, countries still need to address the data and supervision gaps in the nonbank financial sector. This can help prevent the emergence of hidden risks. And the recent developments in the crypto space have highlighted the need for countries to establish uniform standards and regulations for the asset class. Public debt ratios have increased in several countries in response of lower growth and rising borrowing costs. Implementing debt restructuring or refilling early on in a reform package can help avoid more disruptive adjustments later on.
The surge in food and energy prices led to a cost-of-living adjustment. Governments acted quickly to support the affected households and firms, and they were able to limit the impact of the rising prices on the growth of their economies. However, these measures are becoming more costly and should be phased out. Likewise, the energy price signal can be preserved to encourage consumption reduction and limit the risks of a supply shortage. Targeting can be carried out through various social safety nets, such as cash transfers to low-income households. Some of the revenue-generating measures that governments can implement are one-time solidarity taxes, which are usually applicable to high-income households. These implementation of supply-side policies can help address the various structural factors that are hindering growth, such as market power, inefficient education, and rent seeking. They can also help build resilience and reduce the bottlenecks in the supply chain. A strong push for investments in the green energy supply chain can help accelerate the global transition. Overall, urgent actions are needed to strengthen multilateral cooperation and address the various risks that can arise due to geopolitical fragmentation. It is also important to coordinate efforts to resolve the issues that prevent the global supply of vaccines and treatments from being efficiently distributed.
Widespread support for new vaccine technology and the design of effective responses to future epidemic outbreaks are crucial. Addressing debt distress is also a must. More countries must step up efforts to improve the treatment of their debts under the G20 initiative. It is also important that countries agree on the procedures for debt resolution in a wider range of economies, especially those that are not part of the Common Framework. Private and non-Paris Club creditors can play a vital role in ensuring that the processes are carried out in a timely and effective manner. The global trade system can be strengthened to address the various risks that can emanate from trade fragmentation. Doing so can be achieved through the removal of restrictions on certain essential products and services, as well as the upgrade of WTO rules. The use of the global financial safety net is also necessary to address the various threats that have been identified to the global economy. It can be used to support countries that are experiencing severe shocks and to provide them with the necessary resources to address their needs. Also, climate change mitigation policies must be quickly put in place to meet the goals of governments. Doing so through international coordination would help accelerate the decarbonization process. Global cooperation would also help minimize the effects of climate shocks.
Pic Courtsey-Rostislav Artov at unsplash.com
(The views expressed are those of the author and do not represent views of CESCUBE.)
