“2024 is expected to be another turbulent year for the global economy.“
The global economy was full of surprises in 2023. Despite a sharp rise in interest rates, the United States succeeded in avoiding a recession, and major emerging markets did not slide into a debt crisis. Even Japan's aging economy has shown surprising vitality. In contrast, the European Union has lagged behind, with Germany's growth engine faltering after China's four-decade era of hypergrowth suddenly ended.
Looking to 2024, several questions loom on the horizon. What might happen to long-term inflation-adjusted interest rates? Can China avoid a more dramatic slowdown, given the turmoil in its real estate sector and high levels of local government debt? Having kept interest rates near zero for two decades, can the Bank of Japan normalize interest rates without triggering financial and systemic debt crises? Will the delayed effects of the Fed's interest rate hikes eventually push the US into recession? Can emerging markets maintain stability for another year? Finally, what is the next major source of geopolitical instability? Will it be the Chinese blockade on Taiwan, the victory of former President Donald Trump in the US presidential elections in November, or an unexpected event?
The answers to these questions are interconnected. A recession in the United States may lead to a significant decline in global interest rates, but this may only provide temporary relief. After all, many factors, including unusually high debt levels, creeping deglobalization, rising populism, the need for increased defense spending, and the green transition, are likely to keep long-term interest rates well above the very low levels in The period 2012-2021 the next decade.
“It will be difficult to keep the Chinese economy operating at full capacity.“
On the other hand, the great efforts made by Chinese leaders to restore 5% annual economic growth face many difficult challenges. First of all, it is difficult to see how Chinese technology companies can remain competitive when the government continues to stifle entrepreneurship. China's debt-to-GDP ratio, which rose to 83% in 2023, compared to about 40% in 2014, is also constraining the government's ability to provide open-ended bailouts.
Because government support is crucial to addressing high local government debt and an over-leveraged real estate sector, China's emerging plan appears to be to spread the pain. This entails allocating national funds to regions, then forcing banks to provide loans to bankrupt companies at below-market interest rates, and finally, limiting new borrowing by local governments.
But it will be difficult to keep the Chinese economy operating at full capacity while imposing restrictions on new lending. Although China is already shifting away from real estate to green energy and electric cars (much to the chagrin of German and Japanese automakers), real estate and infrastructure still account for more than 30% of Chinese GDP, as Yuan Zhenyang and I recently showed, Which confirms the direct and indirect impact of these sectors.
While Japan maintained strong economic growth over the past year, the International Monetary Fund expects its economy to slow in 2024. But Japan's ability to achieve a soft landing depends largely on how the Bank of Japan handles the inevitable and risky shift away from ultra-low interest rates. . Interest rate policy.
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Since early 2021, even with US inflation rising, the Bank of Japan cannot afford to delay this shift any longer. Although Japanese policymakers may prefer to sit idly by and hope that lower global interest rates will strengthen the value of the yen and solve their problems, this is not a sustainable long-term strategy. The Bank of Japan will likely be forced to raise interest rates, or inflation, which has been dormant for a long time, will begin to rise, which would put severe pressure on the financial system and the Japanese government, which currently maintains a debt-to-GDP ratio exceeding 250%. .
“ The probability of a US recession in 2024 remains about 30%, compared to about 15% in normal years. “
Although the US economy, contrary to most analysts' expectations, does not slide into recession in 2023, the probability of this happening is still likely about 30%, compared to 15% in normal years. Despite the unpredictable long-term effects of interest rate fluctuations, President Joe Biden's administration continues to pursue an expansionary fiscal policy. As a share of GDP, the deficit is currently 6% – or 7%, if we include Biden's student loan forgiveness program – even though the economy is operating at full employment. Even a divided Congress is unlikely to cut spending significantly in an election year. The high cumulative inflation rate over the past three years amounted to an effective default of 10% on government debt – a one-time event that cannot be repeated soon without serious consequences.
Amid an unusual mix of economic and political shocks, emerging markets have managed to avoid a crisis in 2023. While this is largely due to policymakers adopting relatively conventional macroeconomic strategies, some countries have benefited from rising geopolitical tensions. India, for example, has taken advantage of the war in Ukraine to secure huge quantities of Russian oil at discounted prices, while Turkey has emerged as a major conduit for transporting sanctioned European goods to Russia.
With geopolitical tensions escalating and opinion polls indicating that Trump is currently the most likely candidate to win the US presidential elections, 2024 is expected to be another turbulent year for the global economy. This is especially true for emerging markets, but don't be surprised if 2024 turns out to be a tough year for everyone.
Kenneth Rogoff is a former chief economist at the International Monetary Fund, professor of economics and public policy at Harvard University, and recipient of the 2011 Deutsche Bank Prize in Financial Economics. He is co-author (with Carmen M. Reinhart) of “This time is different: eight centuries of financial folly” (Princeton University Press, 2011) and author of “The curse of money” (Princeton University Press, 2016).
This commentary is published with permission from Project Syndicate — The global economy is not out of the woods
