- Conference of January: Will 2024 be an economic turning point? - January 29, 2024
- Conference of December: “Global actors in the Israel-Gaza war” - December 25, 2023
- Conference of November: Who killed the Chinese economy? - November 29, 2023
The Center for Global Development organized a discussion based on the World Bank’s January 2024 “Global Economic Prospects” report.
- Panel Members: M. Ayhan Kose, Deputy Chief Economist and Director of the Prospects Group, World Bank Group. Charles Collyns, Senior Advisor, Econofact; Former Director of the Independent Evaluation Office, International Monetary Fund. Hanan Morsy, Deputy Executive Secretary (Programme) and Chief Economist, United Nations Economic Commission for Africa. Liliana Rojas-Suarez, Director, Latin American Initiative and Senior Fellow, Center for Global Development;
- Moderator: Masood Ahmed, President, Center for Global Development
Ayhan Kose presents the main points from the first chapter of the Global Economic Prospects of the World Bank, which provides a global outlook. Regarding the other chapters available, the second provides a regional outlook, and the rest (the third and the fourth) are about investment acceleration and fiscal policy in commodity exporters.
Three questions guide Kose’s introduction: What are the near-term prospects for the global economy? What are the major risks confronting the global economy? And, what are the policy priorities?
What are the near-term prospects for the global economy?
Global growth is set to decelerate in 2024 for the third consecutive year, partly due to tight monetary policy and subdued trade and investment. Determinant factors are geopolitical tensions such as the Russian invasion of Ukraine, the turbulence in the Middle East, and central banks’ interest rates increase…. The good news is that there is no major financial crisis. Nevertheless, global growth is expected to decline. As it is portrayed in the graph, growth will increase a little bit, except in China.
There is a divergence in overall performance. The US and China have low growth rates. China has the lowest rate since 1990 outside of the pandemic period, which is less than 5% growth). Another observation is that the major economic engines are also slowing down, as seen in the chart below.
In terms of emerging economies, those with strong credit ratings will achieve significant growth, while those with weak credit ratings will struggle to grow. Another challenge for them is financing conditions, as the real interest rate is at the highest level. The speed of rate hikes is quite remarkable.
The global growth average was the weakest. While China and India made significant progress, emerging economies stagnated and fragile conflict states regressed.
Major risks confronting the global economy?
Risks are slightly more balanced but still tilted to the downside amid heightened geopolitical tensions. Key risks include an escalation of conflict in the Middle East, a sharp monetary tightening of financial conditions, further economic problems in China, and climate-related natural disasters.
In addition, inflation is expected to decline this year, approaching the 3% average. However, forecasting uncertainty remains, especially if conflicts escalate, potentially impacting energy prices and overall inflation rates. In developing emerging markets, the gap between bond yields and economic growth has widened. Previously, conditions were favorable as long as these economies could sustain growth above borrowing costs. Now, as real interest rates turn positive and financing growth becomes more difficult, countries with credit ratings below C are finding it increasingly difficult to issue bonds. This shift underscores the tightening of financial conditions in these economies.
Regional GDP Per Capita (PC) growth compared to advanced economies shows a mixed picture in 2021-2025 compared to 2010-2019, which was a challenging decade for emerging markets. While East and South Asia show relatively high GDP growth PC compared to advanced economies, average growth remains lower than in the previous decade. PC income growth has been low or even negative, hampering the expected transformation of regions such as Latin America, the Middle East and sub-Saharan Africa. Another major challenge is the negative growth in International Development Association (IDA) per capita incomes, which had been positive in previous periods. This trend reversal raises concerns about the economic well-being and development trajectories of IDA-supported regions.
What are the policy priorities?
Climate-related needs are driving the demand for a surge in investment. The current slowdown in investment growth, which is significantly lower than in the 2000s, underscores the importance of implementing a comprehensive support package. This package should focus on strengthening fiscal frameworks and positions and improving fiscal and monetary policies and institutions, to catalyze the necessary economic recovery. The interlinked challenges of climate, food insecurity and debt underscore the need to believe in a multilateral system. In sum, addressing these issues requires immediate action and a robust support framework.
Discussion between panelists.
Charles Collyns echoes Kose’s analysis, noting an encouraging near-term outlook with a stronger-than-expected recovery in the US. However, Europe faces challenges, notably an energy supply shock from the war in Ukraine, raising concerns about a possible recession. The biggest concern is emerging market developing economies (EMDEs), where progress has been slow over the past five years and the likelihood of continued sluggishness remains. Factors such as subdued growth, globalization headwinds, high-interest rates, and the negative impact on economies with vulnerable debt positions contribute to this concern. Enduring factors such as the loss of the demographic dividend and geopolitical uncertainty are expected to persist, making a return to previous growth levels unlikely.
In the context of China, the economic miracle has come to an end, and the question remains whether the end will be a real estate crisis or a managed soft landing. China has reached the end of the road in terms of the drivers that drove its remarkable performance from the 1980s to 2010, pointing to a continued slowdown. This is due to several factors, including overinvestment in the housing market, state-owned enterprises, infrastructure and transport, which has led to increasing fragility in the financial system. The public and private sector is constrained, entrepreneurship is not sufficiently encouraged, and uneven access to finance poses challenges, making it difficult to achieve growth above 5%.
The speaker emphasizes the importance of addressing threats to equity and inclusion, acknowledging that the rapid growth of the past has lifted people out of poverty. However, sustaining and ensuring inclusive growth is now a critical challenge in the current economic landscape.
Latin America Focus
According to Liliana Rojas, most Latin American countries have been successful in managing inflation, except for Argentina and Venezuela, which face both inflation challenges and the lowest growth rates. As there’s an understanding of the detrimental effects of high inflation, there is consensus and support for raising interest rates. However, there is a lack of agreement among policymakers and congresses to implement the critical structural reforms needed for sustainable growth. This creates a vicious circle that hampers economic progress and fosters social discontent and political divisions, ultimately making consensus on reforms more difficult to reach.
Latin American countries, which are politically polarized to a great extent, have experienced a potential decade of lackluster growth, with problems emerging even before the COVID-19 pandemic, especially after the commodity boom ended in 2015. The pandemic exacerbated existing problems, including a deterioration in the quality of governance, democratic institutions, and dysfunctional labor markets with a prevalence of informal workers. The lower productivity of the informal sector is a major constraint to growth, exacerbated by lock-ins.
Sub-Saharan Africa Focus
In sub-Saharan Africa, population growth remains high at an average rate of 3%, keeping per capita numbers low and stagnant. Major economies such as South Africa, Nigeria and Ethiopia face challenges, particularly in debt management. A significant portion of public sector revenues (30-40-50%) goes to debt service, which has implications for Eurobonds, especially as interest rates rise in the medium term. These factors indicate potential pressure points for emerging markets over the next five years.
Challenges
For Kose, the expectation is the region’s growth as a whole will reach 3.8% and continue to grow. Nevertheless, challenges remain in key economies such as Nigeria, South Africa, and Angola, where weaknesses could affect overall regional performance. Per capita income growth is particularly weak at 1.2%, raising concerns about relative impoverishment compared to advanced economies.
A significant concern is the growing debt challenge, with eight to ten countries, including Congo, Ghana, Somalia, Sudan, and Zambia, already in debt distress. In addition, twelve countries, such as Kenya and Ethiopia, are at high risk of debt distress. Public debt remains high at 60% of GDP, and a significant share of revenues (11%) is devoted to debt service. This dire situation has implications for IDA income convergence.
Opportunities
Hanan Morsy points to potential opportunities that could reshape the outlook for sub-Saharan Africa, even amid rising geopolitical risks and increased global competition. In the face of changing global trade dynamics and increased competition among major economies, Africa stands to benefit from growing trade volumes. The current deep fragmentation of global dynamics presents an opportunity for African countries to address supply chain disruptions. African countries can address these challenges by focusing on cost efficiency, trust, and integration into global value chains through nearshoring.
Access to global value chains is highlighted as a key opportunity that will foster African integration and provide a pathway for growth. In particular, investment in renewable energy emerges as a specific avenue with transformative potential for the continent. It highlights the idea of building value chains around green industries as a potential game-changer for Africa. In addition to aligning with global sustainability goals, this strategy could drive economic growth and development in the region.
Elections and Future Implications
Ahmed raises significant concerns about the global landscape, especially as half the world goes through elections. Policymakers are concerned about the potential shift to more inward-looking governments not committed to multilateralism. The rethinking of trade routes and the potential impact on economies adds another layer of concern.
For Collyns, the upcoming US elections in November carry weight, especially with the possibility of a Trump return. Policies that increase protectionism, pull back from multilateral cooperation, and changes in climate and tax policy could have a significant impact. There’s also a geopolitical concern, with the possibility of countries taking aggressive paths in approaching ongoing conflicts, such as Russia’s actions in Ukraine and potential escalation in the Middle East.
He also emphasizes that leaders should pay close attention to political developments in the U.S., as they can have a significant impact on global dynamics. The potential changes in policies and geopolitical positions underscore the importance of being prepared for a range of scenarios.
For Kose, the 2020s will be a lost decade for the developing world. China’s slowing growth rate raises the question of finding replacements, with India expected to contribute, but the need for more countries to achieve higher growth remains critical. Structural problems in global trade growth and continued tight financing conditions add complexity to the situation. The big question raised is the need for smart cross-country cooperation within the global community, including policymakers from developing countries. Addressing these challenges will require thoughtful and cooperative efforts at the global level.
References:
Center for Global Development (2024, January 18). The Global Economy in 2024: Turning a Corner? [Video]. YouTube. https://www.youtube.com/watch?v=hQaDFm-c8bU&t=342s&ab_channel=CenterforGlobalDevelopment
