The world economy in 2023 was full of surprises. Despite the sharp rise in interest rates, the United States managed to avoid a recession and major emerging markets did not fall into a debt crisis. Japan’s elderly economy also showed surprising vitality. In contrast, after China’s 40-year era of high growth came to an abrupt end, the European Union fell behind as Germany’s growth engine stalled.
As we look to 2024, several questions arise. What will happen to long-term inflation-adjusted interest rates? Given the turmoil in the real estate sector and high levels of local government debt, can China avoid another dramatic slowdown? Can the Bank of Japan (BOJ), which has maintained near-zero interest rates for 20 years, normalize interest rates without triggering a systemic financial or debt crisis? Will the impact of the Federal Reserve’s delayed interest rate hike ultimately push the US into recession? Can emerging markets maintain stability for another year? Finally, what will be the next major cause of geopolitical instability? Will it be China’s blockade of Taiwan, former President Donald Trump’s victory in the November US presidential election, or some unforeseen event? Is not it?
The answers to these questions are interrelated. A US recession could lead to a significant drop in global interest rates, but this may only provide temporary relief. Ultimately, several factors, including extraordinarily high debt levels, creeping deglobalization, the rise of populism, the need for increased defense spending, and the green transition, pushed long-term interest rates significantly beyond the ultra-low levels of 2012-2021. It is likely to be maintained at a higher level. Next 10 years.
Meanwhile, China’s leaders’ tremendous efforts to restore economic growth to 5% per year face several difficult challenges. First of all, it’s hard to see how Chinese tech companies can remain competitive as the government continues to suppress entrepreneurship. Additionally, China’s debt-to-GDP ratio has soared from 40% in 2014 to 83% in 2023, constraining the government’s ability to provide unlimited relief.
China’s new plan appears to be about spreading the pain, given that government support is essential to dealing with high levels of local government debt and an overleveraged real estate sector. This includes allocating state funds to local governments, then forcing banks to lend to failed businesses at below-market rates, and finally discouraging new borrowing by local governments.
But it will be difficult to keep China’s economy running at full speed while imposing limits on new lending. China is already transitioning away from real estate to green energy and electric vehicles (much to the chagrin of German and Japanese automakers), but as Yuancheng Yang and I recently showed, real estate and infrastructure are still He emphasized that the country accounts for more than 30% of the country’s GDP. Direct and indirect impacts of these sectors.
Although Japan has maintained strong economic growth over the past year, the International Monetary Fund expects the Japanese economy to slow in 2024. But whether Japan can make a smooth landing will depend largely on how the Bank of Japan handles the inevitable but dangerous transition from ultra-low levels. interest rate policy.
Considering the yen,
US dollar yen
It remains almost 40% lower than the US dollar.
DX00
Despite the sharp rise in US inflation since early 2021, the Bank of Japan cannot afford to delay this transition any longer. Japanese policymakers may want to sit back and hope that lower global interest rates will cause the yen to appreciate and solve the problem, but that is not a sustainable long-term strategy. The Bank of Japan is likely to need to raise interest rates, or long-dormant inflation will begin to rise, putting severe pressure on the financial system and the Japanese government, which currently maintains a debt-to-GDP ratio of over 250%. It will take a while.
Contrary to most analysts’ expectations, the U.S. economy did not fall into recession in 2023, but the chance of that happening is still probably around 30%, compared with a normal 15%. Despite the unpredictable long-term effects of interest rate changes, President Joe Biden’s administration continues to pursue expansionary fiscal policy. Even with the economy operating at full employment, the deficit as a percentage of GDP is currently 6%, or 7% if Biden’s student loan forgiveness program is included. Even with a divided Congress, it is unlikely to make significant spending cuts in an election year. High cumulative inflation over the past three years has effectively amounted to a 10% government debt default. This is a one-time occurrence and will not be repeated anytime soon without serious consequences.
Despite an unusual combination of economic and political shocks, emerging markets managed to avoid crisis in 2023. This is largely due to policymakers adopting relatively orthodox macroeconomic strategies, although some countries are taking advantage of rising geopolitical tensions. For example, India has used the Ukraine war to secure large quantities of discounted Russian oil, while Turkey has emerged as a key route for shipping sanctioned European goods to Russia.
With geopolitical tensions rising and polls suggesting Trump is now the favorite to win the US presidential election, 2024 will be another tumultuous year for the global economy. This is especially true for emerging markets, but don’t be surprised if 2024 is a difficult year for everyone.
Kenneth Rogoff, former chief economist of the International Monetary Fund, is a professor of economics and public policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics. He is a co-author (with Carmen M. Reinhardt). “This time it’s different: Eight centuries of financial folly.” Author of (Princeton University Press, 2011). “The Curse of Cash” (Princeton University Press, 2016).
This commentary was published with permission from Project Syndicate. The world economy is not out of crisis yet.