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The past four years have brought three huge shocks: COVID-19; post-COVID-19 supply disruptions; and Russia’s invasion of Ukraine and subsequent surge in commodity prices. Is this series of huge shocks over now? Deadly attacks on Israel and the conflict in Gaza suggest the answer may be no. The recent turmoil in bond markets is another sign of an ongoing lack of predictability.
So a well-prepared analysis of the latest IMF report world economic outlook Might be a little outdated. Still, it’s very helpful as always. What it tells us is both inspiring and disturbing. The world economy has proven resilient, but performance has deteriorated over the longer term and there are differences in the performance of rich and poor countries relative to expectations. (See chart.)
Then start with resilience. Here are three encouraging developments: The IMF does not need to make any major changes to its April forecast; last spring’s financial turmoil – with the collapse of U.S. regional banks and Credit Suisse – has abated; On top of that, there is growing evidence that inflation could fall to target without a recession. So deflation may be more “perfect” than I expected. The World Economic Outlook points out that labor markets in many high-income countries remain strong and there is no evidence of a “wage-price spiral.” There is also evidence of “wage compression,” where lower wages rise relative to higher wages. The World Economic Outlook suggests this may be due to the convenience value of flexible and remote working for skilled workers: the latter are prepared to work from home for lower wages.
Still, significant short-term risks remain. First, China’s real estate crisis has become more serious. Another is the possibility of further volatility in commodity prices. Another reason is that consumption has weakened, especially in the United States, as COVID-era savings are exhausted. Another problem is that inflation has proven more resilient than expected: the fact that lowering inflation without slipping into recession seems possible is not a reason to abandon the effort prematurely. Finally, fiscal policy will be more constrained in this new world. Not least, it means developing countries are struggling with expensive debt. Further financial shocks appear possible.
Also, unfortunately, resilience does not mean good performance. As a result, global output will be about 3% lower in 2023 than pre-pandemic forecasts. What’s more, these losses are quite small in high-income countries: there are even slight gains in the United States. But in emerging and developing countries, the impact is more detrimental. This reflects that high-income countries are much better able to cope with shocks than poorer countries that lack the ability to produce vaccines or borrow cheaply. As a result, the pandemic, the war in Ukraine and climate shocks have reversed decades of poverty reduction: 95 million more people will live in extreme poverty in 2022 than in 2019, according to the World Bank.
Recent economic performance has been poor and varied and needs to be viewed in a longer-term context. The “World Economic Outlook” pointed out that the “World Economic Outlook” forecast of global medium-term growth prospects from 2008 to 2023 has dropped by 1.9 percentage points. The decline is widespread. But this is particularly important for developing countries. The expected number of years it will take emerging and developing countries to close half the gap in per capita income with high-income economies has risen sharply, from the 80 years forecast in the April 2008 World Economic Outlook to about 130 years in the April 2023 forecast. The good news about economic convergence is stalling.
There are more long-term difficulties ahead. One of them is climate: last month, the world experienced its hottest September on record, with temperatures an “extraordinary” 0.5 degrees Celsius above the previous record. Furthermore, if real interest rates are to move permanently higher, as some believe, then the conditions for long-term investment and growth will also permanently deteriorate, at a time when significant increases in investment are needed to address the climate challenge and broader development goals. All this is likely to be exacerbated by the rupture of the world economy, rising protectionism and intensifying geostrategic competition. In the worst cases, the scars of recent years are not only irreversible but a harbinger of permanent damage.
In the final analysis, all of these are essentially political problems, or political problems without solutions. We have the resources and technology needed to manage them. There is no good reason for so many people to live in such miserable conditions. There is no reason why we should not address climate and other environmental challenges. But to do this, we need to recognize our common interests, the need for collective action, and the imminence of possibilities that until recently were considered remote.
Overall, we are bad at thinking and acting intelligently, and now, we are getting worse because of the chaos in Washington, D.C., China’s poor policy choices, Russia’s criminal war in Ukraine, the ongoing conflict between the two countries Any form of peace can be achieved. This is shown by the inability of Israel and Palestine, as well as by poor countries, to avoid some of the consequences of recent shocks.
At their annual meetings in Marrakech, policymakers need to agree on a significant increase in resources from the International Monetary Fund and World Bank. Almost everyone knows this. Will this happen? People must be very suspicious of this. But it should be so. It’s time for humanity to grow up a little.
martin.wolf@ft.com
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