Central banks have embarked on austere monetary policy in order to crush inflation. Fears related to the financial system, from bond markets to commercial property to the health of banks, are not fading. Some 4 billion people are called to the polls this year, with unforeseeable consequences. Most worrying of all, the world is on fire, with conflicts from Ukraine to Israel to the Red Sea. Other wars, especially in Taiwan, do not seem very far away. It is not surprising that analysts speak of “polycrisis”, “infernal scenarios” and “new world disorder”.
And yet, at least for the moment, the global economy is laughing in the face of those fears. At the beginning of 2023, almost all economists predicted the outbreak of a global recession that year. Instead, global GDP grew by around 3%. This year, early indications are that progress continues at the same pace. Data from Goldman Sachs bank indicates that global economic activity remains as lively as in 2019. A weekly GDP estimate calculated by the OECD, a club of mostly rich countries, shows similar results. Another indicator of global activity based on surveys of purchasing managers (the PMI index) points to solid growth around the world.
Labor markets are even stronger. Across the OECD, the unemployment rate remains comfortably below 5%. The proportion of working-age people who are actually employed, a more accurate indicator of the strength of the labor market, is at an all-time high. The good health of labor markets is boosting family economies, which were affected by inflation. The real disposable income of G-7 households fell by 4% in 2022, but is now growing again.
It is true that some countries are not doing so well. Chinese growth figures continue to disappoint. Some of those from Europe are worrying. Germany, facing the fallout from high energy prices and competition in its famed auto sector from Chinese exports of electric vehicles, may be in recession. However, there is also more solid data. In January, total nonfarm employment in the United States increased by 353,000 jobs, a spectacular figure that exceeded almost all expectations. In Brazil, a country that has had weak growth for several years, the latest PMI data is encouraging.
So far there doesn't seem to be much evidence that problems in the Red Sea are derailing the economy. PMI data indicates that manufacturers are facing longer delivery times. This is consistent with the detour of ships around the Cape of Good Hope, which increases the length of a journey between Shanghai and Rotterdam from 11,000 to 14,000 miles. Now, in almost all economies shipping costs constitute a minimal fraction of the overall price of a good. Even the most pessimistic analysts predict a rise in inflation, due to the disruption of the Red Sea, equivalent to little more than a rounding error.
Why is the world economy so oblivious to the new global disorder? High interest rates have managed to reduce inflation from a peak of over 10% across the rich world to around 6%. This not only increases the purchasing power of households, but also helps lift their spirits. In fact, after reaching an all-time low in 2022, consumer confidence in the rich world has increased considerably. The rise in borrowing costs has been cushioned by the fact that much of the debt held by households and businesses is tied to fixed interest rates.
There is also a more disconcerting possibility: that, after so many overwhelming world events, the world no longer cares as much about chaos as it once did. That's consistent with academic evidence (including recent work by two Federal Reserve researchers) indicating that the hit to production from a rise in economic uncertainty fades after a few months.
All good economists remain vigilant. Higher interest rates may have a delayed impact on growth. An escalation in the war between Russia and Ukraine or in the Red Sea could trigger another round of shocks to energy supplies and fuel inflation. Anything can happen if Xi Jinping decides to make a move in Taiwan. Now, on the other hand, the fall in inflation and a possible boost in productivity thanks to generative artificial intelligence could lead to an acceleration of GDP. And the global economy has already demonstrated its resilience. Polycrisis, what polycrisis?
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Translation: Juan Gabriel López Guix
