The last four years have brought three huge shocks: Covid; post-Covid supply disruption; and Russia’s invasion of Ukraine and the subsequent surges in commodity prices. Is this series of vast shocks now over? The deadly assault on Israel and conflict in Gaza suggests that the answer may be “no”. Recent turmoil in bond markets is another mark of persistent lack of predictability.
Thus, the carefully prepared analysis of the IMF’s latest World Economic Outlook (WEO) may already be a bit out of date. Nevertheless, it is, as always, very helpful. What it tells us is both encouraging and disturbing. The world economy has proved resilient, but performance has deteriorated in the longer term, combined with a divergence in the performance of rich and poorer countries relative to expectations.
Start then with resilience. Here are three encouraging developments: the IMF has had no need to make any significant changes to its April forecasts; the financial turbulence of last spring – with the collapse of US regional banks and Credit Suisse – has abated; and, most important, there is growing evidence that inflation may be reduced to target without recessions. Thus, disinflation may prove more “immaculate” than I had expected. The WEO notes that labour markets remain strong in many high-income countries, without evidence of “wage-price spirals”. There is also evidence of “wage compression”, with lower wages rising relative to higher ones. The WEO suggests this might be due to the amenity value of flexible and remote working for skilled workers: the latter are prepared to work at home for lower pay.
Nevertheless, significant short-term risks remain. One is that China’s property crisis becomes far worse. Another is the possibility of further volatility in commodity prices. Another is that consumption weakens as Covid-era savings become exhausted, especially in the US. Yet another is that inflation proves more resilient than expected: the fact that it seems possible to lower inflation without a recession is not a reason for abandoning the effort prematurely. Finally, fiscal policy will prove more tightly constrained in this new world. Not least it means that developing countries are struggling with expensive debt. Further financial shocks seem likely.
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Moreover, and unfortunately, resilience does not imply a good performance. Thus, in 2023, global output will be some 3 per cent lower than was forecast before the pandemic. What is more, these losses are rather small in the high-income countries: in the US, there is even a slight gain. But in emerging and developing countries the impact has been more adverse. This reflects the far greater ability of high-income countries to cope with shocks, relative to the poorer ones, which lack the capacity to create vaccines or borrow money cheaply. As a result, the pandemic, war in Ukraine and climate shocks have reversed decades-long trends in poverty reduction: according to the World Bank, up to 95mn more people were living in extreme poverty in 2022 than in 2019.
This poor and divergent recent economic performance needs to be put in a longer-term context. The WEO notes that there has been a 1.9 percentage point decline in medium-term global growth prospects from 2008 to 2023 in WEO forecasts. The decline is general. But it is particularly significant for the developing countries. The expected number of years needed for emerging and developing countries to close half the gap in incomes per head with high-income economies has risen sharply, from 80 years for projections in the April 2008 WEO to about 130 years for projections in April 2023. The glad story of economic convergence is stalling.
There are more long-term difficulties ahead. One is climate: the world experienced its hottest September ever last month after surpassing the previous record by an “extraordinary” 0.5C. Moreover, if real interest rates are going to be permanently higher, as some believe, the conditions for long-term investment and growth will also be permanently worse, just when a huge surge in investment is needed to meet climate challenges and wider development goals. The fracturing of the world economy, with rising protectionism and intense geostrategic competition, is likely to intensify all this. At worst, the scarring of recent years will prove not just irreversible, but a harbinger of permanently damaged performance.
In the last resort, all these are essentially political problems, which is another way of saying they are almost insoluble. We have the resources and technology needed to manage them. There is no good reason why so many people should live in such dire circumstances. There is no reason either why we should fail to tackle climate and other environmental challenges. But to do so we need to recognise our common interests, the need for collective action and the imminence of what were until recently thought to be remote possibilities.
Collectively, we are bad at thinking and acting in sensible ways and, right now, we are getting worse, as the chaos in Washington DC, bad policy choices in China, Russia’s criminal war in Ukraine, the failure to reach any sort of peace between Israel and the Palestinians, and the inability to avoid some of the consequences of the recent shocks for poor countries all show.
At the annual meetings in Marrakesh, policymakers need to agree a huge increase in resources for the IMF and the World Bank. Just about everyone knows that. Will that happen? One must very much doubt it. But it should. It is high time for humanity to grow up a little. – Copyright The Financial Times Limited 2023
