According to economists, the globe will see a decade of moderate growth. However, Daniel Lacalle, the author and head economist of Tressis Gestion, predicts that the global financial system will undoubtedly suffer and experience an unparalleled recession in the next years.
Experts claim that this prognosis is very plausible in light of the numerous catastrophes that have occurred in recent years, starting with the Covid-19 epidemic. Lockdowns and quarantine procedures have caused the global economy to collapse. Moreover, companies and other organizations fail to recover due to various issues, even with lenient Covid restrictions. For instance, Russia’s February invasion of Ukraine had an impact on the world supply chain. A third of the world’s wheat is supplied by Russia and Ukraine together. Only other products’ prices will skyrocket as a result of this.
In the meantime, inflation has worsened in the US and other global heavyweights like China and the UK. As a result, the cost of things has increased, putting pressure on consumers, businesses, and the government. The International Monetary Fund predicts that, as a result, global GDP growth will slow from 6% in 2021 to 2.7% in 2023. Except for the global financial crisis and the severe stage of the Covid-19 outbreak, the IMF claims that the prediction has “the lowest growth profile since 2001.”
“Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook,” said the IMF in a report.
“Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy,” it added.
“Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.”
Global market happy with China
In an unexpected move, the Chinese government relaxed its Covid prohibitions despite a recent increase in Covid cases nationwide. The choice was made after the Chinese leadership received harsh criticism from its people and other world leaders. China’s recent shift toward pragmatism may herald the end of the country’s strident zero-Covid policy, which has harmed both the domestic economy and, indirectly, the global economy. The openness of China’s economy to the world, according to Lacalle, is a positive development that may reenergize markets in 2023.
“We have been looking at a very bleak picture for the Chinese economy, which is essential not just for the growth of the rest of the world but particularly for Latin America and also for Africa,” he said.
“The reopening of the Chinese economy is certainly going to give a significant boost to growth all over the world, but also — and I think it is a very important factor — German exporters, French exporters have felt the pinch of the lockdown and the weakening of the profit environment in China, and this is certainly going to help a lot.”
The openness of China’s economy, according to Lacalle, does not guarantee that the country would see the same level of development as it had in the years before the epidemic. The Chinese government’s move will have a good impact, but it is still very possible that the world economy will slow down.
“I think that we are probably going to move into a decade of very, very poor growth in which developed economies are going to find themselves lucky with 1% growth per annum if they are able to achieve it, and what is more unfortunate than everything else is with elevated levels of inflation,” he explained.
“I think that we are living the backlash of massive stimulus packages that were implemented in 2020 and 2021. That has not delivered the kind of potential growth that many economists expected.”
“I think that markets are starting to price that environment in which the situation globally is not of a buoyant level of growth and economic development, but [is] one that avoids a financial crisis, and if that happens, it is certainly positive.”
IMF and its report
The IMF underlined several other elements in its study, such as international policy, the outlook, and the labor market. For example, the group noted that how nations changed their fiscal policies would affect the prospects for the global economy. Additionally, the conflict between Russia and Ukraine and China’s growth pace would have an impact.
“Risks remain unusually large: monetary policy could miscalculate the right stance to reduce inflation; diverging policy paths in the largest economies could exacerbate the US dollar’s appreciation; tightening global financing could trigger emerging market debt distress; and a worsening of China’s property sector crisis could undermine growth,” it adds.
“Policymakers should focus on restoring price stability and alleviating cost-of-living pressures. Multilateral cooperation remains necessary to fast-track the green energy transition and prevent fragmentation.”
The agency also issued a warning about the rising cost of living. People would require a larger budget if prices rose. As a result, several unions have begun to lobby businesses to raise pay. Companies are under pressure to comply when this occurs, forcing them to look for alternative ways to make money to pay their staff. As a result, some businesses adopt price increases and similar tactics.
“Analysis highlights that more backward-looking expectations require stronger and more frontloaded monetary tightening to reduce risks of inflation de-anchoring. Risks of a sustained wage-price spiral appear limited since underlying inflation shocks come from outside the labor market and monetary policy is tightening aggressively,” the IMF said.