Several weeks into 2024, the consensus forecast for the global economy remains cautiously optimistic, with most central banks and analysts predicting either a soft landing or possibly no landing at all. Even my colleague Nouriel Roubini, famously bearish, sees the worst-case scenarios as the least likely to come true.
The CEOs and policymakers I spoke to during the World Economic Forum held last month in Davos echoed these sentiments. The fact that the global economy did not slide into recession in 2023, despite a sharp rise in interest rates, left many experts optimistic about the outlook for 2024. When asked to explain their optimism, they either pointed to the US economy's better-than-expected performance or expected That artificial intelligence would stimulate a long-awaited increase in productivity. As one finance minister observed: “If you are not an optimist by nature, you should not be finance minister.”
It seems that economists around the world share this view. The World Economic Forum's January 2024 forecasts by senior economists found that while a majority of participants expected a mild global recession in 2024, most were not overly concerned and viewed the expected slowdown as a healthy correction to inflationary pressures caused by excessive demand.
is reading: This bond market reality may crush investors' hopes for a soft landing
Even the disruption of global trade due to Yemeni Houthi attacks against commercial ships in the Red Sea and the ongoing wars in Ukraine and Gaza did not dampen the jubilant mood of analysts and business leaders. The US stock market has reached record levels, and even the usually conservative International Monetary Fund has revised its growth forecasts upward, with the latest World Economic Outlook describing risks to global growth as “broadly balanced.” This characterization represents a significant departure from the cautious tone that the IMF usually uses to discourage finance ministers from engaging in unsustainable spending.
In a crucial election year in which voters in dozens of countries – representing half the world's population – head to the polls, government spending is already expected to rise. In macroeconomics, this phenomenon is known as “political budget cycles”: incumbent politicians want to stimulate the economy to improve their chances of re-election, so they increase public spending and run larger deficits.
“The economic slowdown and the collapse of the real estate sector could push China to the brink of a “lost decade,” similar to what happened in Japan.“
Despite the relatively buoyant consensus, recent developments suggest that risks to global growth remain tilted to the downside. First of all, I am highly skeptical of the Chinese government's announcement that its economy will grow by 5.2% in 2023.
GDP growth figures have long been a politically charged issue in China, especially over the past year, as President Xi Jinping has consolidated his one-man rule by firing several senior officials, including the defense and foreign ministers. With China's economy suffering from deflation, falling property prices, and weak demand, it is increasingly clear that its economic woes are far from over – and that Xi is determined to control the narrative.
Indeed, this combination of a prolonged economic slowdown and a real estate collapse could push China to the brink of a “lost decade,” similar to what happened in Japan. The obvious Keynesian solution to the country's slow train wreck of collapsing real estate projects and local government debt is to initiate direct cash transfers to households. But because Chinese consumers are more likely to save (in contrast to their profligate American counterparts), and because government debt is already rising rapidly, a debt spiral and deflation in China seems increasingly likely.
is reading: The growing threat of global chaos
Meanwhile, despite avoiding a recession in 2023, European economic growth is widely expected to remain lackluster this year. Moreover, European countries' continued unwillingness to invest in their own defense suggests that the potential return of former US President Donald Trump to the White House in January 2025 may require a painful adjustment. Worryingly, European leaders do not appear to be preparing for such a scenario, even though the war in Ukraine is depleting their ammunition stocks faster than they can be replenished.
Europe is also facing negative economic impacts from US President Joe Biden's inflation-reducing law, which uses tax incentives to attract European companies. Although the IRA is ostensibly aimed at accelerating America's transition to green energy, it is essentially a protectionist trade policy. It may have given the US economy a short-term boost, but its long-term consequences may mirror those of the Smoot-Hawley Tariff Act of 1930, which sparked an international trade war and worsened the Great Depression.
However, Biden's trade protectionism is moderate compared to Trump's plan to impose a 10% tariff on almost all imported goods, a move that could wreak havoc on the global trading system. It is understood that European countries support Biden, who – unlike Trump – has repeatedly stressed his commitment to curbing Russian expansionism.
“Regardless of which party controls Congress after the November election, a deficit-fueled spending spree in the United States is all but certain. “
It is troubling that Democrats and Republicans in the United States appear uninterested in cutting government spending, let alone reducing the deficit. Regardless of which party controls Congress after the November election, a deficit-fueled spending spree is certain. But if real interest rates remain high, as many expect, the US government may have to choose between deeply unpopular fiscal tightening or pressuring the Fed to allow another bout of inflation.
Despite the widespread belief that the global economy is headed for a soft landing, recent trends provide little reason for optimism. As the world faces another turbulent year, policymakers and analysts need to keep in mind that a soft landing doesn't mean much if the runway is in a seismic zone.
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 Criticism (Princeton University Press, 2016).
This commentary is published with permission from Project Syndicate — Don't expect a soft landing for the global economy
more: AI can save us and the planet, but we may not be smart enough, Roubini says
Read also: 'doctor. Death' Nouriel Roubini: 'It seems that the worst scenarios are the least likely.' for now.
