Economists sound alarm on global economic uncertainty

ONOME AMUGE 

Global economic prospects remain subdued and fraught with uncertainty, according to the latest Chief Economists Outlook. This is as the global economy continues to grapple with headwinds from tight financial conditions, geopolitical rifts and rapid advances in generative artificial intelligence (AI).

According to the latest Chief Economists Outlook released in January 2024, a clear majority (56%) expect the global economy to weaken in 2024. Seven in 10 economists believe that geoeconomic fragmentation will accelerate, leading to greater divisions between regions and countries. Two-thirds of economists also anticipate the emergence of new growth hotspots as a result of industrial policies, but they also warn of rising fiscal strains and growing inequality between higher- and lower-income economies.

The quarterly briefing paints a mixed picture for the global economy, as 56 percent of chief economists  opine that the global economy will experience weakening conditions, while 43 percent hold on to more robust growth prospects. However, a majority of economists (70%) expect a weakening economy in 2024, and they foresee a loosening of labour markets and financial conditions.  Though inflation expectations have tempered across all regions, growth prospects vary widely between regions, with no single region on track for very strong growth in 2024.

A striking finding from the Chief Economists Outlook is the degree to which industrial policies are seen as catalysts for new growth hotspots. Two-thirds of the global economists see these policies as a source of new growth, with some regions set to benefit more than others. However, even as industrial policies spark new growth, most economists expect a widening gap between higher- and lower-income economies. Generative AI is seen as a potential bridge between these groups, with experts more optimistic about its benefits for higher-income economies.

The  Chief Economists Outlook reveals the delicate balance that the global economy is trying to strike, according to Saadia Zahidi, managing director of the World Economic Forum (WEF). 

Zahidi notes that the economic outlook is both improving and worsening at the same time, with falling inflation on one hand and stalling growth on the other. 

He also points to the tightening of financial conditions, deepening global tensions, and rising inequalities as major sources of concern; and he concludes that the global economy is facing a precarious moment and will require close cooperation and effort from all parties involved to build resilience and sustain growth.

Regional variations

In contrast to the more pessimistic outlook for the global economy, the Chief Economists Outlook is more optimistic for South Asia and East Asia and Pacific. The majority of economists expect moderate or strong growth in both regions, although there is some variation within each region. China, for example, is expected to experience more modest growth than other countries in East Asia and Pacific, due to ongoing weakness in consumption, industrial production, and the property market. Overall, the outlook for these regions is positive but not without some notable concerns.

The latest outlook for Europe, the United States, and the Middle East and North Africa is more subdued than in the previous survey. In Europe, the share of economists expecting weak or very weak growth almost doubled to 77 per cent.

The outlook for the United States and the Middle East and North Africa also weakened, with more respondents forecasting moderate or stronger growth.

Meanwhile, Latin America and the Caribbean, sub-Saharan Africa, and Central Asia saw a rise in optimism, although the expectations for these regions remain moderate overall.

According to a recent study, the near-term outlook for the world’s major economies is much less optimistic than it was a few years ago. Growth momentum across all regions has slowed significantly, with average annual growth declining from 2.0 percent in the early 2000s to 1.4 percent in advanced economies and from 5.8 percent to 1.7 percent in emerging and developing economies. This downward trend is likely due to a number of factors, including the impact of the COVID-19 pandemic, rising inflation, increasing interest rates, and ongoing geopolitical tensions.

Geopolitical rifts compound uncertainty

The study further found that the global economy has been undergoing a restructuring process driven by geopolitical factors for some time now. Rivalry between the US and China, changes in global trade patterns, and a shift towards protectionist policies have all contributed to this trend. Many world leaders are now concerned that global economic cooperation is weakening, and that the current momentum could lead to a full-blown economic cold war.

When asked about the implications of the recent trend of geopolitical influence on economic and financial developments, chief economists overwhelmingly agree that it will have significant repercussions. A majority of economists (87%) believe that geopolitical developments will continue to stoke volatility in the global economy over the next three years, and eight out of ten economists expect this to also affect stock markets.

Notably, findings of the latest Chief Economists Outlook leans to the widespread belief that the pace of geoeconomic fragmentation will accelerate in the coming year. About 70 percent of respondents anticipate faster fragmentation, with the majority saying this will result in greater volatility in the global economy and stock markets, as well as a deepening divide between the Global North and Global South. Respondents also expect the growing fragmentation to lead to more localised supply chains and stronger regional blocs.

The survey also revealed that most chief economists believe that industrial policy tools will be deployed in an uncoordinated manner, with little cooperation between countries. While two-thirds of respondents see potential for industrial policies to drive the emergence of new growth hotspots and industries, they also sound a cautionary note on the rising fiscal costs and the widening divide between richer and poorer countries.

In contrast to the view that geopolitical factors will continue to drive global economic and financial volatility, most chief economists surveyed do not expect an increase in globalisation over the next three years. In fact, two-thirds of respondents predict that globalisation will either stagnate or decline during this period. This is in line with recent developments in supply chain strategies, which have seen a shift away from globalisation and towards localisation, as well as a growing focus on risk mitigation. According to the analysts, if these trends continue, it could lead to a significant loss of economic output globally, with estimates suggesting a potential decline of up to 7 percent.

The projected costs of economic fragmentation are expected to be significantly higher for low-income economies than for advanced economies. The study estimates that the global GDP contraction caused by the reversal of globalisation could reach up to 4 percent in low-income economies, almost double that of advanced economies. This disparity in impact is likely to be caused by a number of factors, including the greater reliance of low-income economies on global trade and investment, as well as their lower ability to diversify their export markets.

The report also highlighted the fact that any gains made by third-party countries as a result of economic fragmentation are likely to be offset by the headwinds from the contraction in major trade partners. 

Industry outlook 

According to the survey, several industries are particularly vulnerable to the effects of the geoeconomic outlook for 2024. These include retail and wholesale of consumer goods, which could be affected by reduced consumer spending due to rising prices and uncertainty. Fossil-fuel energy and materials could also be impacted by geopolitical tensions and the transition to clean energy sources. Financial, professional and real estate services, leisure and travel are likely to face challenges from tighter financial conditions and a more uncertain global economic outlook.

The chief economists surveyed also indicated a more positive outlook for a number of industries. These include information technology and digital communications, which are likely to benefit from the ongoing digitalisation of the economy and the shift to remote work. Mining is another sector that is likely to see a more positive outlook, given the increasing demand for raw materials and minerals needed for the clean energy transition and other industrial sectors. 

Similarly, medical, healthcare and care services are expected to benefit from the ageing population and the growing demand for healthcare services. Low-carbon energy is also expected to see a positive outlook as countries continue to shift away from fossil fuels and towards renewables.

Among the industries that are expected to benefit from recent developments, technology, mining and low-carbon energy are notable because they are seen as key drivers of the global economic transition. The survey respondents believe that the growing demand for renewable energy, such as solar and wind power, will boost the market for new technologies and components. 

Similarly, new industrial policies are expected to stimulate investments in strategic materials and minerals needed for the transition, such as lithium, nickel, and cobalt. The mining industry is expected to be a major beneficiary of this shift, as will the related industries for low-carbon energy generation.

AI takes the spotlight

The Chief Economists Outlook suggests that the benefits of AI-enabled technologies will not be evenly distributed across countries. While a majority of chief economists expect significant productivity benefits in high-income economies, they are more cautious about the potential benefits in low-income economies. This reflects the reality that low-income economies may not have the necessary infrastructure, skills, and capital to reap the full benefits of AI-enabled technologies. 

As a result, there is a risk of further divergence between high- and low-income economies, as well as a potential for inequality to rise within countries.

The outlook also revealed significant differences in expectations about the employment impact of generative AI in high- and low-income economies. The majority of chief economists predict that the employment impact will be negative in low-income economies, whereas views were more divided in high-income economies. In addition, the survey revealed differing views on the impact on standards of living and trust, with more chief economists expecting improvements in high-income economies.