Economic headwinds gathering steam

The Head of the International Monetary Fund (IMF), Kristalina Georgieva, warned on Monday 2nd January that this year is going to be tougher on the global economy than last year. This prediction comes as the main engines of global growth, the United States (US), the European Union (EU) and China, are all contracting simultaneously. 

The IMF expects that one-third of the world economy will be in recession this year.

Even for countries not in an actual recession, the Fund predicts that conditions will still feel recessionary. 

Of the three, the US seems to be in the best shape and may avoid a recession.

However, the situation appears to be dire in Europe, which has been hit particularly hard by the war in Ukraine. According to the IMF boss, half of the EU will be in recession this year. 

The drag on the global economy will be significant, with the IMF projecting growth at 2.7% this year, down from 3.2% in 2022.
 
Furthermore, as China’s economy decelerates, the impact on the global economy will be pronounced. China is currently the world’s second largest economy. Its economy weakened considerably last year due to a number of factors, namely its zero-COVID policy, which resulted in one of the most severe lockdowns for all countries during the pandemic. This disrupted global supply chains and dampened trade and investment flows. 

Prior to the COVID-19 pandemic, China’s economy was responsible for up to 40% of global growth, according to Georgieva. However, with Chinese leader Xi Jinping expressing last weekend that China’s economy is likely to grow by at least 4.4% this year, it is the first time in four decades that its growth will be at or below global growth, as per the IMF. This means that the rest of the world cannot rely on China, at least in the short-term, to compensate for a sluggish global economy.

On a brighter note, the IMF does anticipate that China will move gradually to a higher level of economic performance, and finish the year better off than it is going to start the year. 

Today, 6th January, the US government will release its monthly non-farm payrolls report, which is expected to show the US economy adding a further 200,000 jobs in December, while the jobless rate should remain at 3.7% – near the lowest since the 1960s, according to The Guardian. 

By contrast, weakness in the Chinese economy was evident at the end of last year.

In December, China’s factory activity shrank for the third month in a row and at the fastest rate in nearly three years as coronavirus infections spread throughout its factories. 

Any slowdown in economic activity in the US, EU and China also means that their consumers will have less demand for the goods and services that other countries trade with them. Investors may also choose to hold back their investments not just in those economies, but elsewhere, as global economic headwinds gather steam. 

The World Bank anticipates that the number of countries tightening fiscal policies this year will reach its highest level since the early 1990s. This suggests that many governments will have less room to fund their programmes. 

Developing economies, especially small developing countries, face the prospect of a much harder landing than advanced economies, a concern expressed by the World Bank several months ago. However, for the majority of developing countries, they may find themselves in a situation almost entirely not of their own making. 

To avert the economic pain  that awaits, billions in concessionary financing should be unlocked through the international financial institutions (IFIs). However, developing countries have very little leverage over the decision making of the IFIs.

Longer-term, the issue of reform of these institutions should gain momentum and concrete results. This is one way to ensure that developing countries have a more solid footing to promote their own interests, especially when crises arise.