Global growth is stalling: what must be done?
Director Jagjit Chadha says leaders are failing to make a serious attempt to tackle deepening global problems
Global growth is stalling. The question for us is whether it matters and, if so, what should be done? There is a respectable argument for saying “so what?” Global prosperity is at the height of human achievement, and it could be that our next set of priorities are about securing our standards of living rather than their augmentation.
But global economic growth this year and next will be the slowest since the aftermath of the financial crisis (except for Covid-hit 2020). Negative supply shocks for much of the world and a sharp normalisation in policy rates go a long way to explaining the slow pace of growth in a proximate sense. However, we cannot rule out that something else is happening. There are question marks about long-term growth related to the need to address climate change, an aging and increasingly expensive population, the need for re-shoring and storing inventories, the increased monopoly power in the digital age and the need to reset our institutions fostering international co-operation. We simply cannot ignore these fissures in economic policy.
Perhaps as a consequence of the failure to grasp these nettles, clear recessionary conditions and risks seem ever-present. And these tend to pose difficult questions for mature democracies, where we never seem far from the next general election.
Output in the eurozone has fallen, albeit marginally, for two successive quarters, with more substantial falls in its major economy, Germany, over the same period. The pace of quarterly GDP growth in the US is likely to fall back in the second quarter, and quarterly GDP growth in China was markedly slower in the second than in the first quarter of this year. The ending of Covid lockdown in China has boosted economic activity, particularly in East Asia, but worrying downside risks for activity, particularly in the manufacturing sector, remain.
Outside the major advanced economies the outlook is somewhat stronger, but with so much of the economic catch-up complete, their growth rates may well be in secular decline to advanced-country levels. Under these circumstances the demand for something to be done may be increasingly hard to ignore. And the hand of populism has strengthened around the world.
To add to the pressures, this year will also see the peak in policy interest rates in the major advanced economies. The rapid increase in policy rates over the past year-and-a-half is starting to bite in terms of slower growth, risks of recession and falling inflation. While the reductions in oil and commodity prices will reduce annual headline inflation in advanced economies, the monetary authorities will be watching to see how underlying inflation progresses. We expect it to be more persistent than headline inflation but do expect it to fall.
At these times, central banks and financial markets will be mindful of risks of financial fragility following the bank failures in the US and as higher interest rates hit borrowers. The International Monetary Fund has re-engaged with considerable efforts to help Argentina, Sri Lanka and Pakistan this year and other countries may follow: total IMF credit outstanding has been rising and, as of June 30, stands at SDR112 billion ($150 billion).
Continued uncertainty over the war in Ukraine, food prices and financial stability mean that the outlook for economic activity remains subject to considerable risk. The best way ahead would be a serious attempt to co-ordinate on the key problems we face. But the merry-go-round of G7, G20 and Spring and Autumn meetings of the global economic leaders simply does not focus on enduring responses. And so, the stall may well lead to stagnation for years to come.