Global Economies Condition in 2023 with the backdrop of economic gloom globally in 2007-2008
? Global Economies Condition in 2023 with the backdrop of economic gloom globally in 2007-2008 v
The global economy is?projected to grow? 6.0 % in 2021 and the April 2021 WEO, the 2021 global forecast is unchanged but with offsetting revisions. 4.9 % in 2022. Some economic indicators strengthen amid persisting inflation and investor uncertainty; central banks keep to a tightening course. The January 2023 World Economic Outlook Update projects that global growth will fall to 2.9 % in 2023 but rise to 3.1 % in 2024. The 2023 forecast is 0.2 %age point higher than predicted in the October 2022 World Economic Outlook but below the historical average of 3.8 %. Rising interest rates and the war in Ukraine continue to weigh on economic activity. China’s recent reopening has paved the way for a faster-than-expected recovery. Global inflation is expected to fall to 6.6 % in 2023 and 4.3 % in 2024, still above pre-pandemic levels.
Ten Years After Reflections on the Global Financial Crisis
This brief is based on a conference that marked the 10-year anniversary of the global financial crisis. It explores the origins of and response to the crisis and the lessons learned from it. The “Ten Years After” Brief contains summaries of research articles and central banker discussions from the “2008 Financial Crisis: A Ten-Year Review” conference that took place in November 2018 in New York City. In “Deglobalization: The Rise of Disembodied Unilateralism,” Harold James describes the growing opposition to globalization in the wake of the crisis, with an associated decline in cross-border investing and international trade. However, he notes that opposition to globalization may lead to its reform and resurgence. Gary Gorton relates financial crises to the vulnerability of short-term debt, broadly defined. This vulnerability is inherent in market economies because maturity transformation is an essential function of banks, which in turn are necessary for market economies to exist. Therefore, financial crises have occurred repeatedly throughout history.?
During the next two decades, several global economic trends, including the rising national debt, a more complex and fragmented trading environment, the global spread of trade in services, new employment disruptions, and the continued rise of powerful firms, are likely to shape conditions within and between states. Many governments may find they have reduced flexibility as they navigate greater debt burdens, diverse trading rules, and public pressure to deal with challenges that range from demographic shifts to climate change. Asian economies appear poised to continue decades of growth, although potentially at a slower pace. Productivity growth will be a key variable globally; increased growth rates in the Organization for Economic Cooperation and Development (OECD) countries would help governments deal with economic, demographic, and other challenges; and increased growth rate in Asia could help countries avoid the middle-income trap.
Over the next few decades, the economic costs of aging will strain public finances in all G20 economies, unless difficult decisions are made to either reduce benefits and/or raise taxes. Economic trends during the next two decades probably will vary more than trends in demography and climate. Economic forecasting is inherently uncertain and highly connected to other key trends, including technology, as well as government policies. In this section, we focus on several longer-term economic routes that are creating both opportunities and challenges for states and nonstate actors.
HIGH NATIONAL DEBT ENDURING, RISING
?National debt levels have risen in almost every country since the 2007-08 global financial crisis and are likely to continue to face upward pressure through at least 2040. Strong borrowing in response to the COVID-19 pandemic, rising old-age dependency burdens in most of the largest economies, and increased demands on governments to spur economic growth as well as respond to other global challenges have all contributed to the debt levels. National debt to gross domestic product (GDP) ratios were higher in 2019 than in 2008 in almost 90 % of advanced economies, including the US and Japan, and leaped upward in 2020 because of the pandemic and government responses. Average debt ratios in emerging markets in 2019 were comparable to those that prevailed during the debt crisis wave of the mid-1980s and 1990s. In 2019, the International Monetary Fund (IMF) assessed that approx. two-fifths of low-income developing countries were at high risk of, or in, debt distress. During the next few decades, the economic costs of aging will strain public finances in all G20 economies, unless difficult decisions are made to reduce benefits or raise taxes. Reducing national debt ratios during the next 20 years is likely to be even more challenging than during the decade that followed the financial crisis. The cost of providing healthcare and pensions in most of the largest economies, as well as paying for other social programs, will remain a drag on discretionary spending without major productivity gains or a reduction in the cost of these services. Slow economic growth in some economies could reduce tax revenues and impair governments’ ability to reduce spending because of the need to invest in economic recovery and infrastructure or respond to the effects of climate change.
?Sustainable for Some, but Others are at Heightened Risk of Default.?
A prolonged period of low-interest rates, similar to the post-financial crisis period, would increase the affordability of debt for some economies, including advanced economies in Asia, Europe, and North America, allowing them to sustain higher national debt ratios. The world’s major central banks, including the European Central Bank, the Federal Reserve, and the Bank of Japan, have pursued an ultra-low interest rate policy for at least the past decade, and most economists expect these countries to be able to sustain high debt ratios because they have borrowed in their own currency. Departures from this policy could increase debt servicing costs and increase the risks associated with high debt ratios. Emerging and developing economies that have financed at least some of their debt with external borrowing are at increased risk of debt distress and could face a debt crisis, even if global interest rates remain low because local currency depreciation and increased risk premiums could increase servicing costs. Some governments are likely to face the choice of reining in public spending and risking public discontent or maintaining public spending, which would further increase debt burdens and borrowing costs and risk local currency depreciation. Facing these choices, some governments are likely to prioritize spending on domestic issues rather than the global commons.
?DISRUPTIONS IN EMPLOYMENT
The global employment landscape will continue to shift because of new technologies, notably automation, online collaboration tools, artificial intelligence (AI), and perhaps additive manufacturing. Tasks that once seemed uniquely suited to human abilities, such as driving a car or diagnosing a disease, are already automated or potentially amenable to automation in the next decade. Studies have estimated that automation could eliminate 9 % of existing jobs and radically change approximately one-third in the next 15 to 20 years. Emerging technologies will also create jobs and will enable greater virtual labor mobility through Internet-based freelance platforms that match customers with self-employed service providers as well as speed-of-light commercial data and software transmission.
Demographics, specifically aging populations, will promote faster adoption of automation, even with increases in the retirement age. Most of today’s largest economies will see their workforces shrink over the coming two decades as aging workers retire. South Korea is projected to lose 23 % of its working-age population (age 15-64), Japan 19 %, southern Europe 17 %, Germany 13 %, and China 11 % during this period, if the retirement age remains unchanged. Automation—traditional industrial robots and AI-powered task automation—almost certainly will spread quickly as companies look for ways to replace and augment aging workforces in these economies. Automation is likely to spread more slowly in other countries, with the key being whether it offers cost advantages, including over low-skilled labor. The number of jobs created by new technologies is likely to surpass those destroyed during the next 20 years, judging from past episodes. One study by the World Economic Forum estimates that by 2025, automation will have created 97 million new jobs and displaced 85 million existing jobs. Several factors, including skills, flexibility, demographic factors, underlying wages, the share of jobs susceptible to automation, and access to continuing education could influence how well individual countries are able to adapt to automation. For example, countries with growing working-age cohorts are likely to experience more employment dislocations or downward pressure on wages than countries with older populations at comparable levels of automation.
?Automation may affect a growing share of the workforce. In the past two decades, it has replaced mostly middle-skill job professions, such as machine operators, metal workers, and office clerks. Automation may increasingly affect more high-income professions, such as doctors, lawyers, engineers, and university faculty. Although new jobs will emerge, there is likely to be a skills mismatch between jobs lost and jobs created. This mismatch could lengthen the period of unemployment for many workers as they attempt to gain the skills required for newly created jobs, and it could further skew the distribution of gains. More youthful economies might be more agile if they are able to provide the education needed to properly train new entrants into the workforce.
?COULD 2040 BE JOBLESS?
The breadth and speed at which AI could replace current jobs raise questions as to whether economies will have the capacity to generate sufficient new jobs and whether workers will have the requisite skills for the new jobs created. During the next few decades, AI appears likely to follow the trend of previous waves of innovation, resulting in net job creation over time, but it may lead initially to an overall decline if jobs disappear faster than new ones are created. Alternatively, some economists question whether AI could lead to more continuous disruption to labor markets, as machines rapidly gain in sophistication, resulting in more persistent job losses.
MORE FRAGMENTED TRADING ENVIRONMENT
?The global trading system is likely to become even more fragmented during the next two decades. Since the creation of the World Trade Organization (WTO) in 1995, little or no progress has been made toward additional global trade agreements. Regional and bilateral trade agreements have proliferated, further fragmenting the global trading environment. Only a single multilateral agreement, the Trade Facilitation Agreement, has been completed since the WTO’s inception. Progress has been limited by fundamental differences over agricultural trade and related subsidies and protection of intellectual property rights among member countries as well as by a widening divide between developed and developing countries. Lacking updates, current trade rules are inadequate for new types of flows, including e-commerce and other services. However, barriers to trade in global services, such as data localization rules, and the continued desire to protect domestic agriculture are likely to make future agreements to update the WTO even more difficult.
?As WTO rules become increasingly antiquated, future regional agreements are likely to establish new rules and standards, especially for new types of commercial transactions, resulting in further fragmentation of global trade rules. There has been a large increase in the number of bilateral and regional trade arrangements since the formation of the WTO, and more limited progress in sector-specific agreements. Some of these agreements not only cover tariffs and market access but also establish rules and standards in areas not covered by the WTO or other global multilateral agreements, such as the digital trade rules in the United States–Mexico-Canada Agreement. Larger agreements, including the Asia-focused Regional Comprehensive Economic Partnership (2020), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (2018), and the Africa Continental Free Trade Area (2020), are likely to boost regional trade and could attract more foreign direct investment to these regions. Expanding unilateral, often non-tariff trade restrictions, are likely to further complicate international trade for governments and the private sector, limit trade-driven economic growth, and weaken overall growth. Although the US-China trade war has garnered headlines, many countries have increased their use of restrictive trade measures during the past 12 years. Between 2008 and 2018, the number of restrictive trade-related policy measures implemented globally increased by more than 200 % compared to the previous decade, with Latin America and Asia accounting for 30 % and 40 % respectively. In the Asia Pacific region, for example, non-tariff measures have increased even as applied tariffs have fallen. With a record number of new trade barriers in 2019, trade restrictions are becoming structurally ingrained in the European Union’s (EU) trade relations.
?A combination of the desire to protect jobs in the manufacturing sector, concerns about capturing gains from winner-take-all technological progress, and a focus on critical inputs, such as medical equipment and pharmaceutical feedstocks, is likely to further accelerate the use of protectionist trade policies. The anticipated increase in job losses in manufacturing during the next two decades is likely to place pressure on governments, particularly those in advanced and manufacturing-dependent emerging economies, to take protective actions. In addition, a recognition that technologies, such as AI, could lead to sustainable first-mover advantages—in which is the first to market a new product provides a competitive advantage—might lead some governments to intensify their use of trade restrictions as they jockey for global position. Finally, protecting critical inputs and strategic supplies, especially pharmaceuticals in the wake of the pandemic, could lead to greater trade restrictions for these industries. China, the EU, Japan, and other economic powers will also use their leverage to advance national security goals, further distorting markets. Since 2008, they already have intensified their use of trade restrictions and domestic market regulations for strategic influence. Looking forward, concerns about privacy and control of data streams as well as trade in industrial goods and other technologies are likely to lead to even more activist trade policies for broader national security interests.
?ECONOMIC CONNECTEDNESS EVOLVING, DIVERSIFYING
?In addition to trade policies, demand for and the increased ability to deliver services across borders and the use of e-commerce platform technologies are likely to further transform economic connectedness, including the shape of global value chains, the location of foreign direct investment, and the composition and direction of trade. Despite the fragmentation of the global trading system, trade in a broad range of services, including financial, telecommunications, information, tourism, and others, is poised to increase during the next two decades. In OECD countries, services account for roughly 75 % of GDP and 80 % of employment, but the current value of services trade globally is only one-third of that of manufactured goods, suggesting that there is significant room for growth. The WTO’s Global Trade Model estimates that global trade would grow by around 2 %age points more than baseline growth through 2030 if countries adopted digital technologies, which would facilitate the expansion of services trade and provide a further boost to continued growth in economic connectedness.
New Manufacturing Technologies Shifting Trade.
??The configuration of global supply chains in 2020 largely reflected the importance of economies of scale and labor as a source of value creation in the manufacturing sector, leading to the centralization of production in a few lower-wage locations, especially in China. A large increase in the use of digital technologies and additive manufacturing might reduce the importance of economies of scale and labor as input and encourage firms to move more production closer to markets. These new production technologies could diminish the attractiveness of locating production in China and accelerate the rate at which companies reorient their supply chains.
?E-Commerce Platform Economy Firms Enabling Global Trade.?
?Cloud computing, automation, big data analytics, AI, and other information technologies are enabling new distribution modes that expand access to international markets for all sellers but especially for small and medium-sized enterprises that have historically faced high foreign market entry costs. E-commerce platform firms, which in 2020 included the Chinese firm Alibaba and America’s Amazon, are creating a marketplace that matches buyers and sellers independent of geographic location, providing a comparatively low-cost and low-risk way for firms to enter foreign markets, and increasing international trade flows. E-commerce sales in 2018 were equivalent to 30 % of the global GDP that year, according to data released in 2020. International e-commerce spanned business-to-business and business-to-consumer sales; approximately 25 % of all online shoppers made cross-border purchases in 2018. Looking forward, increased access to the Internet, falling data costs, growth in smartphone ownership, and a shift to online purchases post-pandemic are likely to result in more e-commerce sales, with many of these sales taking place on large global e-commerce platforms.
?Multinational “Superstar” Firms Perpetuate Economic Globalization.?Technology and digitization are also transforming the structure of some industries, increasing the prevalence of oligopolies and near monopolies and resulting in a global superstar or “winner-take-all” firms. Global superstar firms are the world’s largest and most profitable across all industries, including pharmaceuticals, consumer goods, and information technology. These firms captured approximately 80 % of economic profit among companies with annual revenues greater than $1 billion in 2017 and earned approximately 1.6 times more economic profit than they did in 1997. Superstar firms, while domiciled in a single country, have sales that are global, and growth in the size and reach of these firms is likely to translate into an increase in economic globalization. The economic factors that support the rise of global superstar firms, including high fixed costs, low marginal costs, network and platform effects, and machine learning, are likely to persist through the next two decades. Further, as technology, including big data and machine learning, and intangibles, such as brands, become increasingly important drivers of value creation during the next two decades, the market dominance of superstar firms is likely to increase. Growth in superstar firms is also likely to affect the division of economic gains between and within countries, potentially leading to friction and uneven regulation as host economies try to capture some of the value created by these firms. The power of these firms beyond business—including control of data and information flows—will encourage government efforts to regulate them, essentially as public utilities, or possibly break them up.
?State Owned Multinationals Continue to Expand.
??State-owned multinationals (SOMNCs), most of which originated in China, India, Russia, Saudi Arabia, the United Arab Emirates (UAE), and some EU member countries, almost certainly will continue to be active participants in international commerce. Some SOMNCs may distort the global competitive landscape because of the state support that they receive. As the competition for technology leadership intensifies, SOMNCs, including those from China, could increase their reliance on state support to capture and lock in first-mover advantages, prompting private companies to lobby their governments to intervene on their behalf.
?UNCERTAIN FUTURE OF MONEY
The financial sector is not immune from the technological changes that are transforming other industries. Digital currencies are likely to gain wider acceptance during the next two decades as the number of central banks' digital currencies increases. China’s central bank launched its digital currency in 2020, and a consortium of central banks, working in conjunction with the Bank of International Settlements, is exploring foundational principles for sovereign digital currencies. The introduction of privately issued digital currencies, such as Facebook’s proposed Libra, would further drive the acceptance of digital currencies. The extent to which privately issued digital currencies will provide a substitute for the use of national or regional fiat currencies, including the US dollar and the euro, to settle transactions will depend on the regulatory rules that are established. The US dollar and the euro are also likely to face threats from other fiat currencies, the potency of which will depend on changes in the current international financial architecture and the global importance of international linkages. Privately issued digital currencies could add complexity to the conduct of monetary policy by reducing countries’ control over their exchange rates and money supply.
CONTINUED TILT TOWARD ASIA
Global economic activity has been tilting toward Asia during the past 40 years, reflecting its higher rate of economic growth in comparison with the rest of the world, large population, and reduction in grinding poverty—a trend that almost certainly will continue through at least 2030 and perhaps through 2040. Some of the most populous countries in Asia are positioned to be among the world’s largest economies by 2040, even as their per capita income lag behind that of advanced economies. Asia’s record growth during the past 40 years has resulted in a convergence between Asian standards of living and those of middle- and even high-income economies. In 2020, China and other developing Asia countries contributed 18 % and 7 % respectively to global GDP. If these trends continue, by 2040 developing countries in Asia are projected to account for approximately 35 % of global GDP, with India and China as the largest contributors at 29 % of global GDP, according to Oxford Economics.
?The faster economic growth in Asia could lead to some of the most populous countries being among the world’s largest economies by 2040. For example, faster economic growth in India—on track to be the most populous country by 2027—could propel India into the ranks of the world’s three largest economies. Similarly, faster growth in Indonesia, the world’s fourth most populous country, could allow it to break into the ranks of the top 10 economies by 2040. However, their standards of living or per capita GDP are likely to remain well below those of advanced economies.?
COULD AI BOOST PRODUCTIVITY?
Labor productivity growth has fallen in most economies during the past two decades even as there have been large advances in technology. The next wave of technological improvements, including AI could reverse this trend.
AI might have large effects on productivity during the next two decades, in line with the delayed nature of productivity gains from electricity and information technology. The pace of adoption could also affect productivity gains. According to one study, AI could boost global GDP by 1.2 % per year if 70 % of companies adopted some form of AI by 2030. Although any gains are likely to be unequally distributed, both between and within countries, countries that are net gainers from an AI-induced productivity boost would have expanded economic opportunities that could allow them to deliver more services, reduce national debt levels, and finance some of the costs of an aging population.
?BROADER IMPLICATIONS AND DISRUPTIONS
The economic environment of the future, characterized by increasing national debt, a more complex trading environment, diversified global connections, and employment disruptions, will increase strains on governments. Taken together, these trends are likely to shift economic influence to a broader range of players, including private corporations and less open economies, led by China.
?Straining Contributions to Global Challenges.?
?The high national debt, and associated debt servicing costs, could restrict the financial contribution that governments are able and willing to make toward global public goods and to address shared challenges, including global health and climate change. Wealthy countries might cut back on health assistance programs—or be unable to expand them to match population increases in poor countries. Less investment could delay emissions mitigation measures, and developed countries could backtrack on commitments to provide adaptation financing to the developing world. Slower growth and high debt could also limit the ability of some governments, including those in developing countries most at risk from the adverse effects of climate, from investing in adaptation measures to protect their infrastructure and communities from extreme weather.
?Phantomization Spurring Economic Growth.
?E-commerce platform firms will not only sustain globalization by matching customers and businesses across borders, but they can also facilitate growth in domestic business by offering a marketplace for domestic firms and customers to meet. The rise of e-commerce platform firms could help spur the growth of small and medium-sized enterprises, which have historically made a significant contribution to economic growth and job creation. These small and medium-sized firms often face funding constraints, but e-commerce platform firms offer lower customer acquisition costs and potentially greater market reach that could reduce costs, increase financing, and enable faster growth. In developing and emerging markets, these platform firms could lower the barriers to entry, help unlock financing, and provide an avenue for the formalization of the underground economy. Greater regulation of platform firms—particularly by countries trying to impose trade barriers—might reduce gains.
?Increasing to ?International Economic Governance.?
?The number of large but still developing economies and their relative economic weight is likely to increase during the next 20 years. These economies, led by China, could increasingly demand more influence over the direction of economically focused international organizations, altering standards and norms to reflect their economic interests, some of which may be incompatible with the interest of advanced economies. Other frictions might emerge because these economies are large in aggregate but still considered developing based on per capita GDP, giving them access to concessions from the IMF, World Bank, and WTO. These tensions could shape the future orientation and undermine the effectiveness of these organizations, as well as result in the creation of more parallel organizations and increase the influence of developing economies on global economic rules.?Central banks?attempt to reduce inflation with higher interest rates, but not all corners of the economy are cooling down as intended. In manufacturing, the output is indeed subdued outside China, but global indicators point to a general acceleration in the services economy. In the United States, positive retail sales totals and outsize job growth suggest a stronger business environment in early 2023. In China, the purchasing managers’ index (PMI) for manufacturing, a key leading indicator, reached 52.6 in February, the highest reading in more than a decade. The nonmanufacturing PMI for China rose to 56.3 on higher services and construction activity in an economy awakening from the “zero-COVID” closures. In the eurozone, services growth pushed the composite PMI (for manufacturing and services) above the expansion line of 50 with a reading of 50.3 in January; the indicator then advanced to 52.6 in February, the highest mark recorded since May 2022.
While some economic data run counter to predictions of recession made at the end of 2022, stop-and-go financial markets and corporate belt-tightening attest to CEO and investor uncertainty. The caution comes from a still-high consumer- and producer-price inflation. For consumers, energy and food prices were the principal inflation drivers to begin with, but core inflation rates have since climbed as well. Central banks, meanwhile, keep raising policy interest rates: at February meetings, the US Federal Reserve raised its rate to 4.5–4.75%, the European Central Bank to 2.5–3.0%, the Bank of England to 4.0%, and the Reserve Bank of India to 6.5%. Further hikes in 2023 are expected for many of these economies. In Brazil, where the policy rate of 13.75% is one of the highest in the world, President Lula da Silva has sharply criticized the central bank’s course as a major drag on economic prosperity.
A disinflationary process has been observed in many economies, as prices still rise but at a slower rate. Yet today’s inflationary dynamics are stubborn things. In India, inflation receded in monthly steps from 7.4% in September 2022 to 5.7% in December. In January 2023, however, inflation came back, rising to 6.5% on higher prices for cereals (+16.1%) and spices (+21.1%). In the eurozone, a similar pattern is emerging: inflation accelerated in February in Germany (9.3%), France (7.2%), and Spain (6.1%), as the energy price shock from last year continues to filter through to the cost of goods and services. Rather than slowing, core inflation ticked up, to 5.6% (from 5.3% in January). European Central Bank president Christine Lagarde stated that an interest rate hike of 50 basis points is “very likely” in March. In the United States, meanwhile, where the inflation rate has descended from 9.1% in June 2022 to 6.4% in January 2023, core inflation also went the other way in January, bouncing up to 4.6% from 4.3% in December 2022. Questions on the minds of most US and eurozone economists and policymakers are whether the central banks can reach inflation targets of 2% without triggering a recession and whether doing that would be worth the economic cost. In other recent data, global and individual consumer confidence indicators did not generally worsen in January but remained stable at a low level. Retail sales remained positive momentum in the United States and the United Kingdom in January; in older data, sales retreated in the European Union and China in December.
The global PMIs for both manufacturing and services measured mild contraction in January at 49.1, improving in February to 50.0. Also in February, individual manufacturing PMIs show improvement across surveyed economies. While mild contraction persists in developed economies, China’s manufacturing engines returned to expansion territory. Individual services PMIs, meanwhile, are almost uniformly in expansion, especially?strengthening in China?and the developed economies.
Overall, in 2022, world trade expanded by 3.2%. At the end of the year and into 2023, however, trade volumes slumped. In December, volumes decreased –0.9% (–1.7% in November); notably, exports from China and the United States decreased. In January, the Container Throughput Index decreased to 120.2 (from 124.4 in December) as traffic declined in northern European ports. After a slight uptick in December, the Global Supply Chain Pressure Index returned to its easing course in January 2023.
Unemployment rates remain relatively low in all surveyed economies: 3.4% in the United States, 6.7% in the eurozone, 3.7% in the United Kingdom, and 7.9% in Brazil. In a clear sign of economic momentum, the US economy added 517,000 new jobs in January, the highest total in more than a year. In the developed economies, inflation is slowly easing but it is still high enough to push consumption levels lower and keep interest rates elevated. In emerging economies, disinflation is proceeding more rapidly, especially for producer prices. The Brent crude price, now at $86 per barrel (March 6), is about where it was at the beginning of the year. With significant stockpiles of natural gas and a mild winter, Europe has benefitted from a three-months’-long?decline in natural gas prices. At €42 per MWh on March 6, prices are still more than twice their level on the same day in 2021. Food price inflation has slowed but prices of key foodstuffs in some locales remain as much as 30% or 40% above prewar or pre-pandemic norms.
Inflation expectations implied in the yield spreads of US Treasuries remain in the range of 2.3% to 2.5%. Equity indexes in the developed economies—especially Europe—have been gradually recovering in the new year. The US dollar strengthened in February, against the euro ($1.07), the pound ($1.20), and the yuan (6.87 renminbi). The equities?volatility index?remains elevated in comparison with pre-pandemic levels. Yields on long-term government bonds eased in February.
AREA/COUNTRY WISE
United States.?The US housing market is under pressure from higher interest rates. The average 30-year fixed-rate mortgage, which was above 7.0% in November 2022, is still high, now measured at 6.32% (February 16). According to the National Association of Realtors, sales of existing homes fell –0.7% in January 2023, to an annualized rate of four million units, the lowest in 12 years.
Eurozone.?According to official estimates, the eurozone economy likely expanded by 3.5% in 2022. Among the largest economies, Spain is estimated to have expanded the fastest at 5.5%, followed by the Netherlands (4.4%), Italy (3.9%), France (2.6%), and Germany (1.9%). Overall, the eurozone economies slowed in the second half of 2022, however, when GDP grew at an annualized rate of 1.9%.
United Kingdom.?The economy narrowly avoided a contraction in Q4 2022. Inflation eased in January, and the unemployment rate increased slightly. Wholesale energy prices have fallen, but domestic inflationary pressures have been firmer than expected. The United Kingdom and European Union are on a trade deal covering Northern Ireland.
China.?Positive manufacturing and services indicators and solid investment growth signal the economy’s return to faster expansion after the lifting of zero-COVID restrictions. The residential property sector remains a risk, though new home sales increased 14.9% in February over last year’s mark, the first such expansion in 20 months.
India.?The economy will likely have grown at 7.0% by the end of the fiscal year 2022–23; inflation jumped to 6.5% and the central bank raised the policy rate; the Union Budget for the fiscal year 2023–24 provides a 33.0% increase in capital investment.
Brazil.?The new president of Brazil, Luiz Inácio Lula da Silva, criticized central bank policies, naming the policy interest rate (Selic rate) of 13.75% and inflation target of 3.75% as growth-constricting and too extreme for Brazil. He elaborated that the cost of borrowing is preventing Brazil’s economy from expanding faster. Inflation has been steady at 5.8% for two months; GDP expanded 0.4% in the third quarter, below expectations. In response to the president’s criticism, central bank head Roberto Campos Neto, appointed under the Bolsonaro administration, reaffirmed his commitment to policy tightening.
?The energy transition: A region-by-region agenda for near-term action
?What practical actions could countries take now to ensure that the energy transition both accelerates and proceeds in an orderly fashion?
领英推荐
?The energy transition: A region-by-region agenda for near-term action
As 2022 comes to a close,?the energy transition seems more disorderly than ever. A world economy is shaken by a global pandemic and the surging inflation that has accompanied the subsequent recovery has had to contend with a tragic conflict in Ukraine and its aftermath of human suffering, rising energy costs, and declining energy security. The immediate response has meant more short-term reliance on fossil fuels and fewer available resources for the transition, not to mention additional challenges to regional and global coordination.
?As we look forward to 2023 and COP28, the dual imperatives of ensuring energy resilience and affordability and of reducing emissions appear equally inescapable. Instead of delaying action, we believe these imperatives emphasize the importance of accelerating coordinated long-term action, at the same time as taking short-term measures. The looks at these actions through three different lenses: actions that apply on a global scale; actions that apply more specifically to regions that take into account their local needs and nuances; and finally, actions that various stakeholders including governments, financial institutions, companies, and individuals could take to find a path to a more orderly transition.
Our focus is on near-term, critical action, and we use 2030 as the time horizon. We are aiming to describe neither a longer-term path with its implications nor the implications of the current momentum. Three factors motivate this choice: the need to move from commitments to clear plans and actions; the recognition that transitioning our energy system is a slow-moving process and that actions taken now could take years to have the desired consequences; and the sense that time is running out.
Momentum toward renewables is growing but without a corresponding decrease in global emissions
The world’s progress toward cleaner energy has been accelerating. Over the past decade, the production of renewable energy has more than doubled globally, and its share of total primary energy consumption has grown from?9 % in 2011 to 13 % in 2021. While renewables broadly defined encompass a range of energies, including hydropower and geothermal energy, we focus here mainly on solar and wind energy. Despite growth in renewable energy, the use of fossil fuels is also expanding to meet the growing demand for energy. Global energy demand?grew by 14 % from 2011 to 2021, fueled mainly by emissions-intensive sources. As a result, global energy-related emissions have increased in the past decade by about 5 %, or 1.7 gigatons (Gt) of CO2, and the share of primary energy from fossil fuels has remained largely unchanged, at 82.
Prescriptions for the role of fossil fuels cannot be simplistic, given this continued reliance. The net-zero transition requires steep and decisive declines in fossil-fuel consumption. At the same time, in one scenario of our analysis (the “achieved commitments” scenario, which implies a 1.7°C rise in global temperatures by 2100), global demand for natural gas could be higher in 2030 than in 2021, while oil consumption would decline by less than 5 % in the same time frame. Securing this supply would require investment in fossil fuels to ensure energy resilience and affordability. Achieving a more orderly transition entails balancing the accelerated decommissioning of inefficient and highly polluting assets such as coal or oil power generation facilities with incremental investments in lower-emissions fuel production. To the extent that fossil-fuel investments are made, they should be directed toward lower-emission options and flexible assets that can rapidly adjust their production as demand decreases to meet net-zero goals. Investments and actions to reduce the carbon intensity of fossil fuels, such as addressing methane emissions and electrifying oil and gas operations, will also be needed.
The socioeconomic context has become at once more precarious and more receptive to the energy transition. The war in Ukraine has, beyond its incalculable human cost, significantly increased energy and food costs and exacerbated the inflationary trends that were already manifest in the recovery from the COVID-19 pandemic. It has also elevated the urgency of energy resilience and affordability. In addition, the pandemic disrupted global supply chains and inflated, among others, the costs of energy-project construction. These challenges have heightened awareness and spurred new actions toward an energy transition, particularly in Europe.
The conclusion of COP27 last month has brought renewed uncertainty on the path to the energy transition. While progress was made in pursuing global cooperation through the establishment of Loss and Damage funding arrangements for particularly vulnerable countries, progress on emissions mitigation remained largely elusive.1?According to our analysis, achieving national commitments could lead to significant progress toward a 1.5° pathway. However, after COP27, it is less obvious whether these critical targets will be met.
Physical climate risk and its visible manifestations are also continuing to grow. Specifically, according to the?sixth assessment report of the United Nations’ Intergovernmental Panel on Climate Change (IPCC), extrapolation of current policies would lead to a median global warming of 2.4°C to 3.5°C by 2100 and put limiting global warming to 1.5°C beyond reach.?McKinsey analysis?indicates that there could be an annual gap of 2.4 Gt carbon dioxide equivalent (CO2e) (7 % of 2021 energy-related emissions) between the “current trajectory” and the trajectory of an “achieved commitments” scenario.2?To bridge this gap, annual solar and wind installed capacity would need to nearly triple, from approximately 180 gigawatts (GW) of average yearly installed capacity in 2016–21 to more than 520 GW over the coming decade, with different accelerations required across global regions. ?respect to their opportunities and priorities for a more orderly energy transition
The opportunities, challenges, and risks associated with a more orderly energy transition are not distributed evenly around the globe. Some countries can count on greater financial or natural resources, and not all economies are equally equipped to address the challenge of transforming their energy mix. It is therefore useful to identify the primary archetypes, or groupings, into which countries would fall in the context of the energy transition and the corresponding opportunities and challenges.
Considerations of affordability and resilience will shape each country’s ability to achieve a more orderly transition. The following three factors are critical in understanding each country’s ability to make the transition. The first two relate to energy resilience, while the third relates to energy affordability.
The country’s short-term economic reliance on energy imports and emissions-intensive industries.?Some countries rely on imported energy, frequently fossil fuels, for energy security. These include several European countries including Germany, which are exposed because of their high level of dependence on imported fuels, and India and China, which represent the world’s largest population centers and have both high energy needs and highly polluting energy-consumption profiles.
The country’s access to favorable natural resources.?Some countries have limited natural domestic potential for the development of clean energy, such as the required levels of sunshine or wind, suitable land for new projects, or abundant reserves of minerals such as copper and nickel that are critical to the energy transition.
The country’s disposable financial resources and ability to leverage capital to support the energy transition.?The net-zero transition would require an additional $1 trillion to $3.5 trillion in average annual capital investment globally through 2050, according to estimates in our January 2022?report on the net-zero transition. Renewable energy and grid improvements require up-front capital investment. These capital investments pay off over various time horizons in the form of reduced operating expenses and improved energy resilience and cost. The transition will also require investments to address stranded costs in fossil-fuel assets, conduct at-scale R&D, retrain the workforce, offer safety nets to vulnerable groups, and fund early-stage infrastructure deployment to initiate “learning curve” effects. Both more and less affluent countries find themselves under budget constraints these days, but the former have many more resources and face fewer trade-offs than the latter in making these investments.
THE FIVE ARCHETYPES
Based on the examination of these three dimensions, we have defined five main archetypes of countries that face similar challenges and opportunities in the net-zero transition (Exhibits 3 and 4). While each country is different, we believe these archetypes lend themselves to similar sets of actions and priorities for a more orderly energy transition. This categorization of countries reveals that the burdens of the energy transition, and each region’s ability to meet the challenges of adaptation and mitigation, will not be evenly distributed. Moreover, global cooperation and coordinated collective action beyond current levels will be needed: for example, while significant progress has been made in mobilizing public and private financing for developing countries, OECD analysis indicates that the $100 billion target for 2020, set at COP15 in Copenhagen, was likely not met.?The pathway to mobilizing global financial flows from more affluent to more at-risk countries is still unknown, but our analysis indicates that developing countries can benefit from readily available solutions such as abatement and avoidance of coal expansion or methane emissions, which increased financing flows can catalyze. Similarly, affluent countries would benefit from greater availability of critical natural resources from developing countries, which would require investment in the sustainable extraction and processing of these resources.
?
1. Affluent, energy-secure countries.?These countries—which include Australia, Saudi Arabia, and the United States—together account for 8 % of the global population and 22 % of global greenhouse gas (GHG) emissions. They have abundant domestic production of energy and high GDP per capita (as a proxy for the amount of available financial resources and capital). They are likely to remain, energy exporters, as the energy transition unfolds but could reconsider their energy sources to meet emissions targets.
2. Affluent, energy-exposed countries.?These countries—which include Germany, Italy, and Japan—represent 7 % of the global population and 13 % of global emissions. They have a relatively high GDP per capita but are exposed to energy security concerns. The transition could represent an opportunity for them to pivot to domestic clean-energy production; some of the more manufacturing-intensive countries could incorporate more green manufacturing practices.
3. Large, emissions-intensive economies.?China, India, and South Africa are among the countries in this archetype. Together, these countries are home to 37 % of the global population and generate 40 % of global emissions. For these economies, a net-zero transition would naturally focus on finding a balance between meeting growing energy demand with cleaner resources and addressing reliance on the most emissions-intensive fuel, which has historically been relatively low-cost, domestically produced coal.
4. Developing, naturally endowed economies.?Brazil, Indonesia, and Mexico are among the countries with developing, naturally endowed economies. Together, these countries represent 9 % of the global population and 5 % of global emissions. These countries have significant potential for power from solar or wind sources or critical natural resources, such as rare metals, to support the energy transition. A natural priority for these countries would be setting up a framework to develop these resources and move to a sustainable mode of production.
5. Developing, at-risk economies.?These regions include parts of Africa and Southeast Asia, as well as some island nations. Together, they are home to 11 % of the global population and generate 5 % of global emissions. They are characterized largely by agricultural economies and disproportionate exposure to climate risk. Some have limited potential for the development of renewable energy, either because of financial constraints or because of limited natural endowments. Their transition would likely be coupled with the establishment of basic infrastructure services and investment in climate adaptation, and it would likely be possible only with foreign support.
Globally, eight sets of common actions are needed for a more orderly transition
All countries could take eight sets of actions that are necessary in the near term to make the energy transition more orderly. The extent to which these actions are relevant to a given country, and the specifics of their implementation, would of course vary. While these actions address the entirety of the global energy system, most of them focus on energy production rather than consumption. Indeed, while promoting the adoption of green technology on the demand side will be important, we believe that many of the actions to be taken in the near term will interest the supply side, where addressing the scalability of assets and infrastructure and moving energy production toward a smaller carbon footprint will likely be key priorities.
This analysis builds on that groups?the requirements for a more orderly transition?into three categories: physical building blocks; economic and societal adjustments; and governance, institutions, and commitments. Many of these actions are well understood. We believe it is possible and critical to make meaningful progress on all of these actions by the end of this decade.
Physical building blocks
1. Streamlining access to land and simplifying permit processes to accelerate time to deployment for renewables and cleantech.?Streamlining the permit process and limiting the number of required project-approving entities could accelerate project execution. Access to land could be simplified by advancing projects that benefit local communities and by developing land-efficient solutions such as offshore wind. The use of alternative lands—for example, wastelands, which is land degraded by human activities, or Agri voltaic land, which is used for both agriculture and solar-photovoltaic-energy generation—and out-of-the-box solutions such as floating solar photovoltaics could help expand the area suitable for installation of renewables.
2. Modernizing and repurposing legacy infrastructure and creating new assets to accelerate the integration of renewables and cleantech into the energy system.?Investing in developing and modernizing the power grid will be crucial to ensuring that areas with high potential for renewable generation are integrated and connected with demand centers. Also important will be the development of new flexibility solutions such as batteries and better-matching supply and demand through demand-response programs—that is, incentives and technology solutions to adjust distributed energy demand and generation when the grid needs support. Conventional assets such as gas plants or pipelines might still be important to ensure an adequate supply, but they will need to be adjusted to reflect decreasing utilization or repurposed to use a cleaner fuel mix, such as hydrogen.
3. Strengthening global supply chains to secure critical raw materials, components, and labor competencies.?Countries will need to develop resource strategies to match their needs for components and materials with the supply that’s available. This could include investing in product redesign to promote the substitution of constrained or at-risk materials. Promoting recycling and reuse could help limit the demand for critical resources. The selective adoption of reshoring could promote the development of local supply chains. Setting up long-term agreements and partnerships with suppliers could be a hedge against variations in critical supply.
4. Decarbonizing the industry and transportation sectors by investing in new technologies such as hydrogen solutions for energy and carbon capture, utilization, and storage (CCUS), alongside electrification and energy efficiency.?Providing incentives for investments in hydrogen and CCUS solutions could help increase demand in hard-to-abate sectors and, in turn, promote the growth of a green-product industry. Investing in electrification and energy efficiency could boost the decarbonization of the light industry. The transportation sector could address its carbon footprint through incentives for the uptake of light-duty transportation. Technological acceleration could reduce the cost difference between fuel-cell electric vehicles and conventional internal-combustion-engine vehicles for heavy-duty transportation.
Economic and societal adjustments
5. Limiting and mitigating emissions-intensive generation to reduce the carbon footprint of fossil fuels and lower the risk of stranded assets.?Measures to limit the addition of new fossil assets could be introduced to avoid the further expansion of fossil plants, particularly highly intensive assets like coal. Fossil-fuel generation would progressively shift toward balancing intermittent renewables while storage systems are brought to scale. Mechanisms to value the flexibility and capacity of “firm” power generation assets—that is, sources that provide controllable and reliable energy—could be introduced, even as the utilization rates of some of these assets decline. To the extent that fossil-fuel extraction is necessary, basins with the lowest carbon intensity could be prioritized.
6. Managing economic dislocations to promote energy affordability and create fair opportunities for affected and at-risk communities.?Compensation mechanisms such as subsidies will likely be required to ensure energy affordability for the most vulnerable consumers. Regions, especially those more dependent on fossil fuels, will need to accelerate the diversification of their GDP and industrial footprints. Workers in at-risk industries such as fossil mining will need safety nets. Skills programs could be developed to create a new generation of competencies in response to the needs of the energy transition.
Governance, institutions, and commitments
7. Develop stable and attractive remuneration frameworks, market designs, and offtake structures to encourage investments in renewables and cleantech.?Lower-risk frameworks for offtake, such as virtual power purchase agreements (which do not involve the physical delivery of energy) could be applied on a global scale to renewables and to an even broader universe of technologies. In addition, establishing and scaling capacity markets could be a way to reward flexibility and contribute to attracting investments in storage solutions such as batteries and hydrogen.
8. Scaling frameworks and standards to measure the carbon intensity of energy and final products and to develop a global, new carbon economy.?Developing the right carbon standards, incentives, and markets will be important to accelerate the transition. Further, the right carbon pricing could play an essential role in driving the fossil-to-green switch and promoting the viability of business cases for low-carbon technologies. Carbon transparency could ultimately lead to the pricing of carbon contents and the creation of low-carbon or green premiums for hydrogen and other fuels and for commodities such as steel and cement.
These global actions will play out differently across regions and countries and will need to be combined with region-specific actions to enable a more orderly transition. In the full report, we identify some of these regional actions. It is important to recognize that the burdens of the transition would not be felt evenly. Developing countries face unique challenges related to transitioning their energy systems. Three challenges stand out: difficulty accessing private-capital markets; constraints on public spending (particularly if government tax revenues from emissions-intensive industries fall); and the impact of rising energy costs, given the limited safety nets and the imperative in these regions to expand energy access and enable development.
A more orderly transition will therefore need to be a just transition, one that recognizes the specific challenges that developing countries experience and that respond with collective, global, and unified action. This could take various forms, including the expansion of financial transfers to the poorest countries, measures to derisk lending to developing countries (for instance, via a greater role for multilateral development banks), and broader capital-market access.
Key stakeholders can accelerate action to promote a more orderly transition by 2030
Achieving an orderly global energy transition will require all stakeholders to take decisive, coordinated action. It will also require global coordination to ensure an equitable and affordable transition, while not compromising the need for energy security. Global stakeholders will need to consider several key priorities:
Governments and multilateral institutions?have a central role to play in implementing policies and measures to encourage carbon standards and promote investment in renewables, with the objective of translating net-zero goals into an integrated energy plan that combines emissions reductions, resilience, affordability, and energy security and mitigates uneven impacts on communities at risk. Governments will need to work together with the private sector to promote measures that accelerate green technologies and mobilize key resources, such as the domestic labor force and supply chain.
Financial institutions?are instrumental in rethinking investment horizons and risk/return profiles (for example, derisking lending to drive demand for net-zero technologies), disclosing and measuring their portfolio exposure in the near term, and quickly deploying capital toward clean-energy projects. Financial institutions can further contribute “beyond money,” by lending their expertise and guidance to drive the success of green initiatives.
Companies?would gain from focusing on developing net-zero strategies and action plans, prioritizing innovation in green business models and technologies, and securing a sustainable supply chain. For energy providers such as utilities and transmission and distribution companies, priorities will be defining a strategy for carbon-intensive assets to manage stranded-asset risks without compromising energy security; derisking and securing the supply chain for raw materials, labor, and components; prioritizing innovation in business models and technologies; and developing the manufacturing footprint for clean technologies. Companies in energy-intensive industries, such as mining, cement, and oil and gas extraction, could consider setting targets for energy decarbonization, linked to specific, time-bound initiatives such as power purchase agreements and energy efficiency programs, which would also improve their resilience to commodity market fluctuations; investing in energy supply and developments, usually with partners; creating an asset transition strategy to promote a transition of portfolio and operations toward a net-zero world; and developing a procurement and energy risk management strategy to mitigate energy security and volatility risks.
Individuals?can make informed trade-offs and decisions about the behavioral changes that may be required. These could include green-product-purchasing decisions, more efficient use of energy, and shifting of economic priorities. To manage a transition that combines emissions reductions with energy security and affordability, citizens will need to demand greater transparency and accountability from their leaders.
??The China imperative for multinational companies
?Multinational companies operating in China must reconfigure for opportunity and risk. Over the past 30 years,?multinational companies (MNCs) have enjoyed an increasingly open world. Taking advantage of a unipolar globe with relatively free flows of capital, trade, and ideas, MNCs tapped capital from wherever they chose, built businesses optimized for global supply and global demand, and served increasingly globalized customers. That may no longer be possible. In a world reshaped by the coronavirus pandemic, rising geopolitical tensions, renewed inflationary pressures, and war, MNCs must reassess, reevaluate, and reconfigure their businesses for a new era. And China is where some of the most dramatic reconfigurations may take place.
The reconfiguration will not be easy. The sheer size and complexity of the Chinese market may mean that notions of outright decoupling are simplistic; furthermore, we continue to live in a world connected by global flows?of capital, trade, and ideas. As we describe in?a new paper from the McKinsey Global Institute, MNCs face a much more difficult imperative: maintaining access to China’s upsides while managing increasingly complex risks. It is a challenge?that will define the next era for MNCs, and those that solve it will be tomorrow’s winners.
China and MNCs built a mutually beneficial relationship during the past few decades. Between 1990 and 2019, China’s real GDP grew at an average of almost 10 % per year, contributing more than a quarter of global GDP growth, and average household income rose from about $750 to $13,000. That dynamism was a magnet for MNCs, which flocked to China to capture part of the growth. At one point, MNCs employed 16 million people and accounted for more than half of China’s exports. They also helped bring best practices to China, boosting the economy’s productivity in such industries as chemicals and cosmetics. But MNCs have started reappraising their relationship with China. A recent survey indicated that the share of US MNCs perceiving China as one of their top three investment priorities dropped from 77 % in 2010 to 45 % in 2022. Though many MNCs are continuing to invest in China, some are curtailing their operations there or rebalancing their investments toward other countries, and a few are pulling out of China altogether. The reappraisal may seem surprising, given that MNCs’ opportunities in China remain large. In an increasingly multipolar world, China has emerged as a major pole. Its GDP is now 18 % of the global total—a share equal to the entire European Union’s and second only to that of the United States (with 24 %). With advanced technology, such as artificial intelligence, advanced connectivity, and space technology, China is becoming a world leader. China’s climate transition will require investments worth many trillions of dollars, which are likely to represent sizable business opportunities. China is also one of the world’s largest producers of renewable energy products, such as solar panels and battery components for electric vehicles.
But China also presents MNCs with unique risks. Rising tensions with the United States and Europe have the potential to disrupt global value chains, especially in critical sectors. China is aging at the fastest pace among the world’s emerging economies, putting downward pressure on its labor supply. China’s investment exposure to rising real estate prices is driving risk as well. The country’s ratio of debt to GDP is 274 %, a historic high. MNCs are now seriously asking themselves if they have the right strategies to succeed in China. In fact, many are losing ground as the gap widens between the highest- and lowest-performing (Exhibit 1). For the MNCs that grew the most quickly between 2010 and 2021, revenues rose by 20 % per year during the last two years of the period—a pick up from their 16 % annual rate during the first nine years. At the same time, opportunities for low-performing MNCs are shrinking: those whose revenues shrank the most quickly between 2010 and 2021 saw faster revenue loss after the pandemic started (5 % per year) than before (3 %).In, local companies in China are competing with the MNCs more fiercely for market share in many industries. For example, MNCs’ share of all revenues earned in China declined from 16 % to 10 % from 2006 to 2020. Local companies selling portable electronics, groceries, and fifth-generation (5G) infrastructure have gained 20 to 40 %age points of market share over the past decade. The R&D spending of China’s largest public companies grew three times as quickly as that of non-Chinese Fortune 500 companies between 2017 and 2021.
In this context, MNCs are rethinking their China strategies. Their most pressing question can be put bluntly: stay or leave? The answer depends on at least two more questions. First, what is at stake? For example, China accounts for 25 to 40 % of the global market in some sectors, such as cars, luxury consumer goods, and industrial equipment; can companies in those sectors afford to miss out on the China market? Similarly, can companies that depend on supply chains in China or derive important contributions from R&D facilities there afford to leave? Even if they choose to leave, how will they cope with Chinese competitors in markets elsewhere?
Second, how can MNCs derisk business in China? In the following six areas, they will face a spectrum of choices that define the China imperative:
The MNCs that succeed in a rapidly changing China will be those that choose wisely in those six areas. The challenge is formidable, but the opportunity is significant.
CONCLUSION
Global growth is now expected to fall from 3.4 percent in 2022 to 2.9 percent this year, before rebounding to 3.1 percent in 2024. The 2023 growth projection is up from an October estimate of 2.7 percent, as the IMF sees far fewer countries facing recession this year and no longer anticipates a global downturn. The global economy still faces major headwinds in 2023, but the International Monetary Fund says inflation appears to have peaked in 2022. Still, the road back to a full recovery, with sustainable growth and stable prices, is only just beginning, reports Statista. The IMF published its latest?WEO?on Monday, painting a slightly less hopeless picture than three and a half months ago, as inflation appears to have peaked in 2022, consumer spending remains robust and the energy crisis following Russia’s invasion of Ukraine has been less severe than initially feared. That’s not to say the outlook is rosy, as the?global economy?still faces major headwinds. However, the IMF predicts the slowdown to be less pronounced than previously anticipated.
Global growth is now expected to fall from 3.4 percent in 2022 to 2.9 percent this year, before rebounding to 3.1 percent in 2024. The 2023 growth projection is up from an October estimate of 2.7 percent, as the IMF sees far fewer countries facing recession this year and no longer anticipates a global downturn. One of the reasons behind the cautiously optimistic outlook is the latest downward trend in inflation, which suggests that inflation may have peaked in 2022. The IMF predicts global inflation to cool to 6.6 percent in 2023 and 4.3 percent in 2024, which is still above pre-pandemic levels of about 3.5 percent, but significantly lower than the 8.8 percent observed in 2022. “Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe,” Pierre-Olivier Gourinchas, the IMF’s chief economist, wrote in a?blog post?released along with the report. “Inflation, too, showed improvement, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.”
The risks to the latest outlook remain tilted to the downside, the IMF notes, as the war in Ukraine could further escalate, inflation continues to require tight monetary policies and China’s recovery from Covid-19 disruptions remains fragile. On the plus side, strong labor markets and solid wage growth could bolster consumer demand, while easing supply chain disruptions could help cool inflation and limit the need for more monetary tightening. In conclusion, Gourinchas calls for multilateral cooperation to counter “the forces of geoeconomic fragmentation”. “This time around, the global economic outlook hasn’t worsened,” he writes. “That’s good news, but not enough. The road back to a full recovery, with sustainable growth, stable prices, and progress for all, is only starting.”