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Resilience amidst uncertainty

Resilience amidst uncertainty

More than three years after the global economy suffered the largest shock of the past 75 years, the wounds are still healing, amid widening growth divergences across regions. After a strong initial rebound from the depths of the Covid-19 pandemic, the pace of recovery has moderated. Several forces are holding back the recovery. Some reflect the long-term consequences of the pandemic, Russia’s war in Ukraine, and increasing geo-economic fragmentation. Others are more cyclical, including the effects of monetary policy tightening necessary to reduce inflation, withdrawal of fiscal support amid high debt, and extreme weather events.

Despite signs of economic resilience earlier this year and progress in reducing headline inflation, economic activity is still generally falling short of pre-pandemic (January 2020) projections, especially in emerging market and developing economies. Stubbornly high inflation in both developed and developing countries has prompted the most aggressive interest rate hike cycle in decades, causing financial conditions to tighten and exacerbating debt vulnerabilities.

The world economy is predicted to pick up some momentum, expanding by 2.5 per cent in 2024, with inflationary pressures gradually easing. This rate is, however, well below the longer-term (2000–2019) average growth rate of 3.1 per cent. As structural challenges such as scarring from the pandemic, subdued investment, mounting debt vulnerabilities and funding shortages remain unaddressed, the world economy is facing the risk of a prolonged period of subpar growth. Slow income growth would further undermine prospects for progress towards poverty eradication and other Sustainable Development Goals.

Tighter monetary policy

The global economy proved more resilient than expected in the first half of 2023, but the growth outlook remains weak. After a stronger-than-expected start to 2023, helped by lower energy prices and the reopening of China, global growth is expected to moderate. The impact of tighter monetary policy is becoming increasingly visible, business and consumer confidence have turned down, and the rebound in China has faded. Global GDP growth is projected to remain sub-par in 2023 and 2024, at 3% and 2.7% respectively, held back by the macroeconomic policy tightening needed to rein in inflation.

With monetary policy becoming increasingly visible and a weaker-than-expected recovery in China, global growth in 2024 is projected to be lower than in 2023. While headline inflation has been declining, core inflation remains persistent, driven by the services sector and still relatively tight labor markets. Risks continue to be tilted to the downside. Inflation could continue to prove more persistent than anticipated, with further disruptions to energy and food markets still possible.

A sharper slowdown in China would drag on growth around the world even further. Public debt remains elevated in many countries. The world economy is expected to grow by 3.0% in 2023, before slowing down to 2.7% in 2024. Inflation is projected to moderate gradually over 2023 and 2024, but to remain above central bank objectives in most economies. Headline inflation in the G20 economies is projected to ease to 6% in 2023 and 4.8% in 2024, with core inflation in the G20 advanced economies declining from 4.3% this year to 2.8% in 2024.

Surprising growth

Global GDP advanced at an annualised pace of 3.2% in the first half of 2023 compared to the second half of 2022, somewhat stronger than expected a few months ago. Growth was comparatively robust in the United States and Japan, but weak in most of Europe, particularly Germany. Amongst the G20 emerging-market economies, growth surprises have mostly been positive so far this year, especially in Brazil, helped by favorable weather-related agricultural outcomes, India and South Africa.

Growth in China has, however, lost momentum, with the initial impetus from reopening fading and structural problems in the property sector continuing to weigh on domestic demand. The signs of a slowdown in Chinese economic activity are also a concern given China’s importance for global growth, trade and financial markets. High debt, and the scale of the ailing real estate sector provide significant challenges. Consumer spending has been slow to recover after reopening, with high precautionary saving in the absence of broad social safety nets, and the property sector remains very weak. Numerous policy initiatives have been announced recently to support activity, including small reductions in policy interest rates, but it remains unclear how effective these will be.

The marked fall in the dollar price of Chinese exports this year has helped to lower import prices and global inflation, but the scope to offset subdued domestic demand with stronger export volume growth may be limited given weak external demand and the ongoing restructuring of trade and value chains. Among the G20 emerging-market economies, China largely stands apart as having its own cyclical and structural stresses. While most large emerging-market economies have followed the major advanced economies in raising interest rates, in part to avoid unwanted depreciation of their currencies against the US dollar, China has been easing monetary policy to address the slowdown in domestic demand growth. Growth in China is seen as slowing through this year and next after an initial rebound in early 2023 from reopening.

In contrast, GDP growth in the other major Asian emerging-market economies, India and Indonesia, is projected to remain relatively steady in 2023 and 2024: around 6% for India and 5% for Indonesia. The growth outlook in the rest of the G20 emerging-market economies is quite varied, depending importantly on specific national circumstances such as the challenges of high inflation in Argentina and Türkiye, and fluctuations in commodity prices. In general, however, excluding China, a modest improvement in growth is seen among the G20 emerging-market economies over 2023-24. Inflation varies widely among the G20 emerging-market economies. Nevertheless, the same major factors affecting inflation in the advanced economies – the fall back in energy and food prices and policy tightening in most major economies – also bear on the emerging-market economies. Headline consumer price inflation for the G20 emerging-market economies as a group is projected to fall from 9.1% in 2022 to 7.2% in 2023 and 6.6% in 2024, with inflation declining to under 4% in Brazil, Indonesia and Mexico, and remaining very low in China.


A key factor shaping global growth is the rise in interest rates in most major economies since early 2022. Financial conditions have become more restrictive, borrowing rates for firms and households have risen, credit conditions have tightened, and asset price growth has moderated or turned negative. Forward-looking real interest rates have now become positive in most economies, with Japan an exception, encouraging saving and making investment more expensive.

In the United States real interest rates are at their highest level since 2005. Even if policy rates are not raised further, the effects of past rises will continue to work their way through economies for some time, as the rates on existing mortgage loans are adjusted or as corporate loans are rolled over.

Global growth is expected to dip both this year and next, remaining below trend throughout the period. Growth in most advanced economies will continue to be held back by the macroeconomic policy tightening needed to rein in inflation and place the public finances on a sustainable path. Structural strains in the Chinese economy are expected to result in a slowdown of growth in 2023-24. The full effects of the policy tightening in advanced economies are now seen as coming through with a longer lag than previously thought. As a result, annual global GDP growth is now expected to slow from 3% this year to 2.7% in 2024. The cooling of demand pressures is expected to help ease headline and core inflation in most G20 countries, broadly in line with earlier expectations. With the sharper slowdown in China, inflation pressures there are expected to be weak this year and next.

Inflation reached multidecade highs in many economies in 2022. While headline inflation has since come down as supply chain disruptions have eased and commodity prices have declined, core inflation is proving stickier. The specter of high inflation becoming embedded in expectations and leading to pricing choices that keep inflation high haunts central banks. Expectations from professional forecasters, financial markets, and households and a new indicator for firms’ views agree about broad inflation dynamics. Historical episodes in which inflation expectations rose over a sustained period of at least a year suggest that it takes about three years for inflation and near-term (over the next 12 months) inflation expectations to come back to pre-episode levels on average, given historical monetary policy reactions. Although long-term (five years in the future) inflation expectations have generally remained anchored on average, near-term expectations have risen markedly across economies since 2022. Empirical estimates of the expectations channel point to the growing importance of near-term expectations for understanding inflation dynamics. Using a new macroeconomic model with a mix of forward- and backward-looking learners, analysis shows how economies with greater shares of more backward-looking learners prolong price pressures and diminish the potency of monetary policy, since such agents do not consider the future impacts of monetary policy. The share of backward-looking learners in the economy is estimated to be larger in emerging market than advanced economies. By fostering an increase in the share of forward-looking learners, improvements in monetary policy frameworks and central bank communication strategies can help bring inflation back to target more quickly and at a lower output cost—in other words, they can increase the chances that the economy makes a “soft landing.”

As policy tightening gradually rebalances aggregate demand toward potential output, supply chain disruptions have eased, and commodity prices have declined, headline inflation is coming down, but underlying price pressures (as captured by core inflation) remain elevated. Professional forecasters expect inflation rates will return closer to central banks’ targets in 2024, with a shift in their median deviation toward zero and a sharp narrowing of the distribution. However, they also expect that, given the current contrary stance and anticipated policy action going forward, rates will be fully back at targets only by 2026, on average. Since consumption and investment decisions as well as price- and wage-setting processes partly reflect households’ and firms’ expectations about the future pace of price changes, inflation expectations play a critical role in shaping inflation dynamics. Amid the current higher inflation environment, some observers have expressed concerns that expectations could remain elevated or even rise further and long-term expectations could de-anchor from target inflation rates. In turn, expectations that future inflation will rise could feed into current inflation rates, keeping them high. If an expectations channel for inflation is important, it also means that policies that bring expectations down could help to lower inflation more quickly and easily. The idea is that the more effective monetary policymakers are in influencing inflation expectations, the lower the cost in forgone output involved in central banks achieving their inflation objectives. In other words, the expectations channel is critical to whether central banks can achieve the elusive “soft landing” of bringing the inflation rate down to target without a recession. The relevance of inflation expectations for an economy’s inflation dynamics likely depends on the prevailing context and recent experience, as well as on the measures of inflation expectations considered (for example, near- versus long-term mean expectations). In general, when expected inflation is systematically far from actual inflation, what expectations measure is most salient for understanding inflation dynamics is an open question. When inflation is low and stable at central bank targets, economic agents may become inattentive, reducing the information content of expectations. This may have characterized the situation in many advanced economies prior to the Covid-19 pandemic. However, when inflation rises sharply or becomes volatile, then economic agents may become more attentive, and expectations may become an important driver of actual inflation.

Commodity markets are an important channel through which geopolitical fragmentation can affect the economy. Many features of commodities underpin their vulnerability in the event of fragmentation: their highly concentrated and difficult-to-relocate production, hard-to-substitute consumption, and critical role as inputs for manufacturing and key technologies. Fragmentation in commodity markets is on the rise. Measures restricting commodity trade surged in 2022, price differentials across geographic markets have widened for selected commodities, and FDI flows in commodity sectors are in decline—the latter a trend that started before the war in Ukraine.

The global economy is on the path to inflation returning to target without a marked growth slowdown or a sharp rise in unemployment, resulting in better-than-expected growth in 2024. Stronger-than-expected GDP growth in 2023 is about to slow down as tighter financial conditions, weak trade growth and lower business and consumer confidence continues to take its toll on global economies, the Organization for Economic Co-operation and Development’s (OECD) has said. In its latest economic outlook report, the OECD projects in its twice-yearly analysis of the major global trends and prospects for the next two years, a soft landing for advanced economies. Globally, it predicts growth will to ease to 2.7% in 2024, from 2.9% this year, before picking up to 3% in 2025, due to real income growth recovery and lower interest rates. By contrast, GDP growth has held up better in the United States and many other commodity-producing economies.

The emerging market and developing economies have collectively maintained growth rates close to those seen prior to the pandemic. According to the OECD, the eurozone can look forward to 0.5% annual GDP growth for the last three months of 2023. The bloc’s GDP is expected to swell by 0.6% this year, followed by 0.9% in 2024 and 1.5% in 2025 respectively. Headline inflation has fallen almost everywhere over the past year, mainly affected by a moderate level of energy prices in the first half of 2023. However, cuts by key OPEC+ economies and supply disruptions in the oil market resulted in higher oil prices since June. This combined with the uncertainty due to rising geopolitical tensions is currently clouding inflation prospects. Core inflation is estimated to have fallen below 3% in the G7 economies as a whole in the third quarter of 2023, compared to the previous quarter, slowing down from over 4.25% during the first half of the year.

According to the OECD, inflation in the eurozone is going to slow to 2.9% next year following 5.5% this year and will settle at 2.3% in 2025. The ECB’s target of 2% is not a reality for another two years, the outlook signals 2.1% only for the very end of the examined period; the last three months of 2025.

The author, Mr. Nazir Ahmed Shaikh, is a freelance writer, columnist, blogger and motivational speaker. He writes articles on diversified topics. Mr. Shaikh can be contacted at

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