A few European countries, most major economies were able to avoid a recession this year, even as the world economy slowed.
On hindsight, the year 2023 turned out, from an economic perspective, to be rather different from what many observers had anticipated at the beginning of the year. Standing at the precipice of the year to unfold, most thought the worse of what was to come; after all, financial markets had endured a tremendous beating the year prior, and indications were that the United States—then and now still the world’s largest economy—would slide ingloriously into recession.
This was not to be. Save for a few European countries, most major economies were able to avoid a recession this year, even as the world economy slowed. Moreover, this resilience occurred despite several important drivers of international economic activity continuing to grind down. Cross-border trading flows, for example, remained disappointing, with the growth of merchandise trade slipping to just a little below one percent. This is about thrice that rate in 2022, and much lower than the historical trend over second half of the 20th century. International debt is also projected to hit $307 trillion, more than 3 times the size of global output, and $100 trillion higher than the decade priori (which, recall, was in the aftermath of a global financial crisis).
Looking into 2024, many analysts now hold cautiously optimistic views of the year to come. Pricing pressure has receded everywhere; global inflation retreated to 7 percent, having peaked at close to 9 percent the year prior, and with the burner off inflation, interest rates are likely to come down. On the growth front, prognostications include suggestions that the United States will achieve the fabled “soft landing” and skirt an economic slowdown, despite one of the most aggressive rate hiking cycles in recent history) without falling into recession. Some expect China to resolve its housing woes without triggering a collapse of its heavily real estate-dependent economy, while others hope that the European economy that will climb out of its lackluster funk. And India—the one bright spark among in major economies in 2023—will finally fulfill its long-awaited potential and seize the mantle of being the next global growth engine.
While the story of a belated rise of India does truly seem promising (especially after a number of policy disasters in the earlier Modi years, such as demonetization and the botched GST rollout), there are sound reasons to be more reserved about prospects for the other major economies.
The continued defiance of the U.S. economy to the predictions of an inverted yield curve—the notion that a recession is forthcoming once long-term interest rates fall below the short-term one—appears to be under greater threat than ever, as the labor market reveals increasing signs of weakness, even as the boost to consumer spending from stimulus checks issued during the pandemic appears to finally be exhausting.
The deceleration of the Chinese economy also appears unrelenting. Indeed, even if China manages to resolve the downdraft from the implosion of its housing market, the momentum from expansion in its service sector—which revived briefly in the throes of the pandemic—appears to have vanished. The country’s vaunted export machine is unlikely to save it this time round, either, given the erosion in the forces of globalization. And the willingness of Xi Jinping’s administration to actively intervene in the private sector does not look set to change, raising the specter of killing the goose that has (thus far) been laying the golden eggs. Also read: China's reopening: How the biggest investment theme of the year flopped
The prospects for a European strengthening also appear dim, at least in the near term. The overhang from its post-pandemic public debt burden will continue to extract a price in terms of diminished private sector confidence, and the ongoing process scaling back fiscal expenditures, loosening regulatory burdens, and promoting further regional integration will take a while before these structure reforms pay dividends. It is difficult to see how, even with softening inflation, the region’s growth will be in a position to take off in 2024.
Alas, forward-looking indicators, such as the usually-reliable purchasing managers’ index (PMI), do not paint a much brighter picture. PMIs, especially among advanced economies, are a sea of red, and these do not look much better for the major emerging markets (the bright spot here is, again, India). And while there has been a substantial reduction in supply-chain problems—which has had a calming effect on prices—inflationary expectations from consumers and financial markets have remained more skeptical, which could keep inflation elevated, at least relative to the 2 percent rates that so many economies had gotten used to over the past few decades.
On balance, one is left to conclude that the year ahead is likely to be a year of muddle-through, with middling performance by most economies, and little by way of a growth breakout. Some bright sparks exist, however; inflation has cooled sufficiently that many central banks will likely be willing to cut interest rates, providing much-needed relief to many financial markets, especially homeowners facing mortgages. But it would be expecting too much from still-fragile fundamentals for 2024 to be a banner year for macroeconomies worldwide.
Prof Jamus Jerome Lim is associate professor of economics at ESSEC Asia Pacific