The Fractious State of the Global Economy

Almost two years after the waning of the Covid pandemic and a year and a half of the conflict in Ukraine, the world is still fighting consumer price inflation in most parts of the world. That continues to be the biggest obstacle to growth and economic recovery, as consumers cut back their spending, especially on discretionary goods. The fight against inflation by central banks’ monetary policy action does seem to be having an effect on lowering inflation so far, with CPI trending down in developed economies from its post-pandemic highs of well over 10% to around 4% in the US, 5%-6% in Europe and around 7% in the UK.

In India, we are also seeing CPI come down slightly in the past three months, though it has spiked to 7.4% in July 2023, thanks to food price inflation considering that we have had unseasonal and excessive rain in many parts of the country. Besides, with elections in many states expected later this year and with the all-important general elections next year, we ought to be prepared for greater government spending which could fuel inflation. The RBI, in its latest policy announced early August, has kept interest rates unchanged, but has maintained a hawkish stance on inflation. It has also withdrawn liquidity to the tune of Rs 1 trillion by raising the CRR (cash reserve ratio) by 10% to 4.5%, that banks maintain with the central bank.

There are exceptions to this fight against inflation in countries such as Japan and China, where central banks are maintaining an accommodative stance. Even though Japan is seeing higher CPI after decades of being in a deflationary mode, most of it is due to higher import costs thanks to a much-weakened yen. One is not sure if it will sustain. China has just reported its first deflation in decades, with both consumer and producer prices falling. One is not sure how much to read into it, since the fall in CPI was owing to a huge fall in pork prices and core CPI was still higher but by a much smaller amount. However, China is certainly in a slowdown mode, as many other economic indicators such as trade, industrial production and retail sales seem to suggest. I don’t think most people including economists know what to make of the current China story, as there is no apparent reason for consumers to not spend given that there has hardly been much inflation.

One theory doing the rounds is that there seems to be a lack of consumer confidence or that consumer sentiment is not upbeat in China. There are articles that point to Chinese consumers not spending but saving, and that the weakness in consumer demand is slowing down the economy. Adam Posen of PIIE is of the view that the Chinese economic miracle is over and citing similar economic data, he writes that this ought to be an opportunity for the US to attract Chinese students and investors and build its economy. I cannot share the schadenfreude that I sense in his article and I don’t think that Chinese consumers are so scarred by the Covid experience and the zero-lockdowns that they are not spending. If anything, once lockdowns were eased Chinese consumers ought to have been splurging, as pent-up demand manifested itself.

Initial reports indeed were of Chinese travelling both within and outside China and that would have boosted the economies of developed countries as well. Through the lockdowns too, Chinese car companies have been making and selling significant numbers of cars, especially EVs, as subsidies were due to end last year. And to say that Chinese consumers are not spending, when even now Chinese EV companies are producing and selling large numbers of passenger vehicles both domestically and overseas, seems a fallacy to me. The latest corporate earnings of luxury goods companies from the west also show that the Chinese consumer is spending strongly, whereas there is weakness in the US market.

The Chinese housing market is indeed badly affected after the Evergrande crisis and since real estate is almost a third of the Chinese economy, it is bound to affect overall macroeconomic indicators. It is also true that the Chinese leadership made strange policy decisions like cracking down on large private sector Chinese companies including those in the tech sector, which would have hurt private investment sentiment. These, along with the zero-Covid restrictions might be more responsible for the general slowdown we see in the Chinese economy.

However, I think the greatest threat the country faces, is from the ratcheting up of geopolitical tensions with the US and other western countries. And that brings me to the main point of this piece, which is that as the world fights inflation and stimulates economic growth, we are failing to reset fractured international relations between countries. We are also coming up short on dealing with climate change and extreme weather conditions that are likely to be equally damaging to economies around the world. Not to mention the war still raging in Ukraine.

Hurting the world’s economic growth engine can have disastrous consequences for rich and poor countries alike, as I have written before. And it doesn’t affect just the warring countries in today’s globalized world. It sets the context for fractious and opposed views in many other regions, which become playgrounds for the same conflict to play out in myriad ways. Take the latest coup in Niger, for example. While ECOWAS (Economic Council of West African States) is busy trying to re-establish democratic rule in the country, other powerful countries also have huge strategic interests in not just Niger but the entire Sahel region of Africa. China has huge investment in Niger’s natural resources, abundant as the country is in uranium and magnesium deposits besides oil which it would like to protect. On the other hand, the US has been funding Niger’s fight against Islamist terrorism in the country. Russia’s Wagner Group is said to already be active in Niger as well as Chad. The current US-China trade and economic spat means they could find themselves on opposite sides of the conflict in Niger which threatens to spread into wider unrest across the Sahel region.

Which brings me to another important point related to how the world deals with poorer countries such as those in Africa. It is precisely because these countries are poor with high rates of joblessness, lawless and often failed states that they have become hotbeds of Islamist terrorist activity and recruiting ground for terrorist groups. So far, the world has dealt with it in one of two ways: arming the government to fight terrorism and insurgency, or pursuing a purely mercenary economic interest and often a combination of both. Today, the US is invoking national security in limiting US companies’ investments in China in certain technology areas. It would be more effective in protecting national security if it helped poor countries in Africa prevent the growth of terrorism through the right economic policies.

There is something to be said for economic development policies that western and eastern countries can help Africa with. This would require multilateral development and financial institutions too to step in. Unfortunately, too little of this is being discussed or explored. Instead, we still have boatloads of migrants trying to cross the Mediterranean in little dinghies and risking their lives in the process. Or we have the UK returning refugees to detention centres in Rwanda, which is an abominable idea. Even now at the latest ECOWAS summit to resolve the Niger crisis, it appears that only the use of force and diplomacy are being considered. I don’t think there is an economic plan on the table. While the immediate crisis has to be dealt with, there is also the larger issue of how terrorist activity can be prevented in the longer term. I am certain that an economic development policy which aims to strengthen education and healthcare, as well as create enough jobs, is sure to have a more beneficial effect on these African countries.

And it is the African countries that will have to increasingly take charge of their own economies and take responsibility for guiding them through difficult and strife-torn times. It will have to be different from the capture the riches of extractive industries for personal gain along with the complicity of western governments, as despotic rulers in Africa did in the past. However, they will need the assistance of economic experts and multilateral agencies in setting up properly functioning institutions of government and economic policies that aim to reduce poverty and create jobs and growth for all. This is where developed countries can help with advice and funding, without interfering in the running of governments. And here I must mention that the world needs to rethink the kind of aid provided to poor developing countries in Africa and around the world. In times of war and conflict, drought and famine it is necessary to send food aid as well as medicines and healthcare. But the larger aim ought to always be to help the country build its own capacity for growing and providing its own food, making its own products and growing as an economy. This will have to be through investments in better education and healthcare, as well as in various sectors of economic activity, from agriculture to manufacturing, construction and industry as well as services. It is reported that Niger’s economy depends on foreign aid for 40% of its budget requirements and that 41.8% of the country’s population was in extreme poverty in 2021 according to the World Bank.

The other large threat that the world economy faces is damage from extreme weather events and climate change, something that I wrote about last month on my blog. This aspect of climate change is closely linked to the poor and their lives and livelihoods and ought to be given much higher priority in economic policy terms than we care to accord it today.

The global economy is on its way to economic recovery, with Asia and emerging economies contributing significantly to the growth according to the IMF. And with inflation trending down, hopefully private consumption and investment ought to pick up towards the end of 2023 as well as next year. However, there is still talk of America entering a mild and shallow recession during the abovementioned period and Europe too still looks weak.

All this is still manageable, with the right policies. How do we manage the fractious politics and strained international relations, especially as many countries go into elections next year? And while the G20 meetings in India this year are reported to have gone well, and India has also managed to find buyers for its new digital governance infrastructure in the region, I was hoping we would also manage to unite member countries more closely in pursuing a common global growth agenda. I will be writing about this next month, as India’s G20 presidency concludes with the final summit of world leaders in Delhi.

If only the world – especially the economic powerhouses – can put aside their hostile political rhetoric and agree to find ways to strengthen international cooperation. The future of 8 billion lives depends on this.

This article first appeared on my blog on August 25, 2023.