Working Together on Global Economic Challenges

By Qiu Hui

In its latest issue of World Economic Outlook,the International Monetary Fund (IMF) predicted that the global economy will continue slowing down in 2023 and the year ahead.The baseline forecast is for global growth to slow from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024,which is 0.1 percentage points down from the organization’s July prediction.

“It doesn’t surprise me that the IMF lowered its forecast for global economic growth,”said Liu Ying,a researcher with the Chongyang Institute for Financial Studies at Renmin University of China.Since earlier this year,the global economy has been sluggish,with total factor productivity on the decline.The Global South has been outperforming developed countries in the North in economic recovery,as have countries in Asia compared with those in the West.Imbalance,insufficiency,and instability in the global economy have become more obvious,and multiple challenges have to be tackled before economic growth can be secured.

Major Risk of High Inflation

The IMF has adjusted its forecast for the global economic growth on multiple occasions since earlier this year.In this round,it further lowered its prediction for 2024.The growth of 3.5 percent in 2022 or the forecast growth of 3.0 percent for 2023 and 2.9 percent for 2024 are all well below the average of 3.8 percent from 2000 to 2019.

The slowdown is more pronounced in advanced economies than in emerging markets and developing economies.According to the World Economic Outlook,advanced economies are expected to slow from 2.6 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024.The report said that the Russia-Ukraine conflict disrupted the energy and food markets,and that in response to multidecade highs of inflation,countries around the world tightened their monetary policy on an unprecedented scale.

Liu said aggregating debt,high interest rate,high inflation,high risk,and low growth in many developed economies in North America and Europe are the results of tightening monetary policy.In response to high inflation,developed economies have been raising their interest rates in recent years,which pushed up government debt and risk.Since March 2022,the Federal Reserve,the U.S.central bank,has increased interest rates on 11 occasions by 525 base points in total.

As high inflation continued,Euro’s benchmark interest rate on refinancing operations and the interest rates on the marginal lending facility and the deposit facility have all been raised to above 4 percent,hitting historical highs since the Euro zone was created in 1999.“The negative effect was first seen in consumption and investment in advanced economies,which further suppressed economic growth,”Liu said.

In many projections for the global economy,continuing high inflation is listed as an important hindrance to global economic growth.The IMF report noted that although global inflation is forecast to decline steadily,inflation in most economies is not expected to return to target until 2025.According to IMF projections,global inflation will decline to 6.9 percent in 2023.Developed economies face a dilemma of high inflation but low growth,which will further hinder economic recovery.

A car drives past a fuel price display in Freiburg,Baden-Wuerttemberg,Germany,on July 28,2023.Gasoline prices at German filling stations were on the rise again.(PHILIPP VON DITFURTH)

“IMF’s projection figures for developed economies in America and Europe nearly halved from last year,” Liu said.“Given ongoing high inflation,the projections are likely to be further downgraded.”

Growing Regional Divergences

Although the global economy is gradually recovering,it should be noted that economic fragmentation has become obvious in this process,and regional divergences are growing.

The IMF released less-thanoptimistic descriptions of the current global economy.It said that the global economy continued recovering gradually and exhibited resilience,but the growth rate slowed,and regional divergences began growing,showing that global growth still faces multiple challenges.Furthermore,the global economy is seeing important divergences because economic activities in some regions have been far fewer than pre-pandemic predictions.

Many countries face high government debt.The mismatch between increasing demand for economic growth and fiscal resources becomes an increasingly worsening problem.Liu cited the bankruptcy of the Sri Lankan government as an example.High government debt makes a country extremely vulnerable in face of a crisis,increasing fiscal risk,Liu said.The IMF also noted this problem,stating that narrowing fiscal room had become a major predicament for many countries.

Among the factors affecting the global economy,continuing geopolitical conflict is regarded as the most serious.Analysts worry that the escalating Palestine-Israel conflict could cause a surge in commodity prices,plunging the world into a third inflation cycle.Severe volatility has plagued the global energy market since the Palestine-Israel conflict escalated on October 7.Figures on October 9 showed that the West Texas Intermediate Light Sweet Crude Oil futures contract price soared as high as 5 percent,the current price of Brent crude oil went up 4 percent,and Europe’s benchmark contract price for natural gas skyrocketed 12 percent.

Xu Hongcai,deputy head of the economic policies commission of the China Association of Policy Science,said worries about the impact of the Palestine-Israel conflict on the international market are unwarranted.Past wars in the Middle East affected oil prices due to external interference,but neither Palestine nor Israel is a major oil producing country,so they don’t significantly influence global oil demand and supply.Therefore,the conflict will only have a limited impact on the global economy,Xu said.

Rather than regional conflicts,rising antiglobalization sentiments,unilateralism and trade protectionism are the underlying factors undermining the global economic recovery.Liu Ying said that worldwide cooperation is needed for the global economy to climb out of the current predicament.

China’s Economy Drives Global Growth

The IMF’s latest projections highlighted strong resilience exhibited by emerging markets in Asia.It predicted that emerging markets and developing economies in Asia would welcome steady growth and have their growth rise to 5.2 percent in 2023.

Liu attributed the growth potential of emerging markets and developing economies in Asia to multiple factors.She said that unlike the United States and Europe,inflation in Asian economies including China is manageable.The sufficient room for macro and monetary policies enables those countries to muster enough policy toolkits to tackle emerging crises.

Furthermore,Belt and Road cooperation advocated by China has also played a vital role.This year marks the 10th anniversary of the Belt and Road Initiative.Over the years,infrastructure in emerging markets and developing countries has been improved,and connectivity among participating countries has been enhanced.As the Regional Comprehensive Economic Partnership took effect,soft connectivity among countries became smoother,and trade was improved.“These developments created space for rapid economic growth among participating countries to some extent,” Liu said.

It should be noted that the IMF paid special attention to China’s real estate sector.Its report stated that China’s property sector crisis could deepen,which would bring complicated policy challenges.If China’s property prices plummeted,the balance sheets of both banks and households would worsen,which might cause severe financial magnifying effects.China’s economy must escape its reliance on the credit-driven real estate market.

Xu also talked about the impacts of the real estate sector on China’s economy.“In the future,the property sector won’t grow at a certain rate on a yearly basis,” Xu said.Given that land transferring fees diminish by trillions of yuan every year and both investment in the real estate sector and earnings of businesses in the sector are shrinking,the sector will find it hard to get back to previous growth levels even with policy stimulus,Xu explained.

On October 18,China’s National Bureau of Statistics released economic figures for the first three quarters in 2023.It said that China’s GDP in the period totaled 91.3 trillion yuan (US$12.76 trillion),up 5.2 percent year on year at constant prices.China’s economy is on a trajectory of steady recovery.However,attention should be paid to cyclical and structural problems in the economy.Due to adverse effects from the volatile global economy,China’s recovery is still not sufficient,she said.“It takes time to admit whether potential GDP growth has reached expectations,” Liu added.

Steven Barnett,IMF’s Senior Resident Representative in China,said at a meeting about the World Economic Outlook that China contributed one third of global growth and remained the biggest engine for global growth.

“It takes time for policies to generate effects on the market,”Liu said.“When the stimulus package goes into full play in the second half of this year,China’s economy is likely to bounce back robustly.Globally,China is still on the forefront.It is the engine for the global economy,which hasn’t changed.”