Hopeful signs for the economy How is the world economy

Hopeful signs for the economy: How is the world economy doing

analyze

Status: 01/17/2023 08:04 am

Many crises are on the agenda at the World Economic Forum in Davos this week. Recently, however, there have been signs of relaxation in the global economy. This gives hope to experts.

By Till Bücker, tagesschau.de

Energy crisis, high inflation and disrupted supply chains: the global economy has been under severe pressure since the outbreak of war in Ukraine at the latest. The result was low growth and high debt. Recently, however, the first signs of relaxation have appeared. Falling gas prices, declining inflation rates and China’s reopening give cause for hope – rightly so?

up to bucker

IMF does not expect global recession

At least stock market investors apparently believe in a rally. The main German DAX index alone has appreciated by around 8.5% since the beginning of the year, after having recorded the worst stock year since 2018 in 2022. But the picture of the economic situation has improved not only among investors.

The International Monetary Fund (IMF) also does not assume a global recession and maintains its economic outlook. While global gross domestic product (GDP) will continue to slow this year, IMF Director Kristalina Georgieva said she does not expect back-to-back downgrades like in 2022. Instead, she expects the global growth slowdown to bottom out and reverse in late 2023 and early 2024.

The rationale: fears of an increase in oil prices have not materialized, job markets remain robust and people will keep spending despite interest rate hikes to fight inflation. According to the IMF, the world’s largest economy, the United States, can avoid a recession this year and achieve a “soft landing” for its economy. And Germany, as Europe’s biggest economy, can probably avoid a winter slump.

Gas price drop guarantees “significantly improved” situation

“Compared to the situation two or three months ago, the situation in the global economy has improved significantly,” says Sebastian Dullien, director of the Institute for Macroeconomics and Business Cycle Research (IMK) at the Hans Böckler Foundation, in an interview with tagesschau .de. Above all, he points to the fall in the price of gas. “Each euro less in the price of a megawatt-hour means a billion euros less in the German economy.” A similar mechanism applies to other countries, albeit on a different scale, according to Dullien.

Wholesale gas prices in Europe are falling sharply. The TTF futures contract on the Dutch energy exchange, which is used as a benchmark, was around 57 euros per megawatt-hour yesterday. For comparison: in March and August 2022, the price was still sometimes higher than 340 euros. The stabilization of the energy market also affects headline inflation. At the end of the year, consumer prices rose less than expected in both the eurozone and the US.

For Jens Südekum, Professor of International Economics at the Düsseldorf Institute for Competition Economics (DICE) at the Heinrich Heine University, the situation has “clearly improved” over the last six months as a result of the easing of the gas crisis. “The prospect of a bad recession has evaporated,” the expert told tagesschau.de. Kiel Institute for the World Economy (IfW) economic expert Klaus-Jürgen Gern sees it similarly: “The risk of us falling into a global economic downturn has diminished.”

Factors of uncertainty for the global economy remain

And yet: some forecasts for the global economy are still bleak. For example, the World Bank last week warned of a global recession and lowered its growth forecast from 3.0 to just 1.7 percent – outside the crisis years of 2009 and 2020, the lowest figure in nearly three decades. . Star US economist Nouriel Roubini put the probability that industrialized nations would sink into a recession by 2024 at most at 65% in a recent interview with “Handelsblatt”.

How do experts in this country see this? “I would now put the probability of a global recession below 50%,” emphasizes Dullien, an economist at IMK. However, there are still quite big risks, such as an escalation in the war in Ukraine and new problems in the energy markets. The fact that central banks are now raising interest rates more slowly is not immutable either. “There is a risk that they raise interest rates too much and thus trigger or exacerbate a recession.”

“I still believe we have a relatively weak year ahead for the global economy. But I see no reason to be overly pessimistic,” says IfW expert Gern. In Europe, the easing of the energy crisis is preventing an economic downturn. He also expects positive momentum from China throughout the year, where the strict zero Covid policy was recently lifted. According to the German Institute for Economic Research, the reopening of the world’s second largest economy is helping to ease the situation in supply chains.

Supply chain issues lessen

In December, according to a survey by the ifo Institute, only 50.7% of companies in Germany suffered from the fact that pre-ordered products and materials were difficult to obtain. In November, it was still 59.3%. “Due to delivery bottlenecks in 2021 and 2022, companies have not processed a huge mountain of orders that are still in the backlog. Now, despite fewer new orders, they can produce more, which underpins the industry across the world,” explains Gern.

Meanwhile, economist Südekum is slowing down a bit: “The positive development of the global economy is being driven by the US, Europe and China. In addition to the big three players, there are many smaller countries with huge problems.” Developing and emerging countries like Sri Lanka, Egypt or Argentina could fall into debt crises as a result of the turnaround in US interest rates and the associated appreciation of the US dollar.

However, economic researcher Gern considers this scenario unlikely: “The fears that rising interest rates would lead to massive capital outflows and turmoil in financial markets have not materialized.” He doesn’t see why that should change. For Gern, the biggest risk is that US consumption will collapse after all the bailouts.

End to globalization?

In its current risk analysis, the World Economic Forum (WEF), which is currently taking place in Davos, envisions an “uncertain and turbulent decade” in which a “new era” of growth and progress will follow. High inflation, global recession and declining investment may therefore impede open world trade. Therefore, this year’s WEF has the motto “Cooperation in a fragmented world”.

“With the Covid crisis, it has become clear that efficiency is not everything, but resilience is also important,” says Dullien. “A step away from extreme globalization can also be insurance.” Partially outsourcing the production of strategic goods and diversifying partnerships may be more expensive, but it can make life more reliable.

Südekum also sees a reorganization of global supply chains: “Until now, supply chains were designed to minimize costs and were very risky in the event of a pandemic or geopolitical tensions.” Rising costs can put a strain on the economy – but this is not a short-term effect. World trade is still stable. “This year, positive signs predominate.”