UN: Protracted period of low growth looming large, warns report Kanaga Raja

Global gross domestic product (GDP) growth is projected to slow from an estimated 2.7 per cent in 2023 to 2.4 per cent in 2024, against a backdrop of lingering risks and uncertainties, according to a United Nations report.

In its World Economic Situation and Prospects (WESP) 2024 report released earlier this month, the UN said while the world economy avoided the worst-case scenario of a recession in 2023, a protracted period of low growth looms large.

Presenting a rather sombre economic outlook for the near term, the UN’s flagship economic report said that persistently high interest rates, further escalation of conflicts, sluggish international trade, and increasing climate disasters, pose significant challenges to global growth.

It said the prospects of a prolonged period of tighter credit conditions and higher borrowing costs present strong headwinds for a world economy saddled with debt, while in need of more investments to resuscitate growth, fight climate change and accelerate progress towards the Sustainable Development Goals (SDGs).

GLOBAL ECONOMIC OUTLOOK

According to the WESP 2024, the world economy proved more resilient than expected in 2023 amid significant monetary tightening and lingering policy uncertainties worldwide, even as multiple shocks arising from conflict and climate change wrought havoc on the lives and livelihoods of millions, further jeopardizing progress towards sustainable development.

It said while economic growth generally outperformed expectations, especially in several large developed and developing economies, this apparent resilience masks both short-term risks and structural vulnerabilities.

“Amid high levels of debt, rising borrowing costs, persistently low investment, weak global trade, and mounting geopolitical risks, the global economy is expected to grow at a subpar pace in 2024 and 2025.”

The report said while a hard landing of the world economy seems increasingly unlikely, accelerating progress towards the Sustainable Development Goals (SDGs) during a protracted period of subdued growth will remain a daunting challenge.

It said global growth is projected to slow from an estimated 2.7 per cent in 2023 to 2.4 per cent in 2024. Growth is forecast to improve moderately to 2.7 per cent in 2025 but will remain below the pre-pandemic trend growth rate of 3.0 per cent.

“The short-term growth prospects for most developing countries have deteriorated. Forecasts indicate that many low-income and vulnerable countries are likely to see only modest growth in the coming years, making a full recovery of pandemic losses ever more elusive.”

According to the report, several macroeconomic and geopolitical risks are shaping the growth outlook for 2024.

First, it said that while global inflation is projected to moderate further, energy and food prices could surge again due to escalating conflicts and the increasing likelihood of climate shocks.

Inflation fell considerably in almost all regions in 2023, mostly thanks to lower international energy and food prices.

However, core inflation rates, excluding food and energy prices, have remained well above central bank targets in many developed and developing economies.

It said with further easing of commodity prices and softening aggregate demand, global inflation is expected to continue trending downward in 2024. However, in almost a quarter of all developing countries – home to about 300 million people living in extreme poverty – annual inflation is forecast to exceed 10 per cent, further eroding the purchasing power of households and undermining poverty reduction efforts.

The report also said that although inflation slowed considerably in 2023, major central banks are signalling their intention to keep interest rates “higher for longer” as the demand-dampening effects of the fastest and most synchronized monetary tightening in decades are yet to materialize in many countries, including the United States.

“The prospects of a prolonged period of elevated borrowing costs and tighter credit conditions present strong headwinds for a global economy that is saddled with debt while also in need of more investment to resuscitate growth, respond to climate change and accelerate progress towards the SDGs.”

Higher-for-longer interest rates will likely weigh on aggregate demand and push up default rates and may lead to a correction in asset prices, especially in the developed economies, further weakening growth momentum. Tight global financial conditions will also impede capital flows to the developing countries or trigger capital outflows, exacerbating balance-of-payments pressures and debt sustainability risks, said the report.

Finally, the report said that global merchandise trade and global industrial production remain exceptionally weak amid cyclical and structural headwinds.

In the third quarter of 2023, the manufacturing Purchasing Managers’ Index – a leading indicator of economic activity – was in contraction territory in all of the world’s largest economies except India.

The report said this weakness is partly attributable to tighter financial conditions and a continued shift towards spending on services, but it also reflects heightened economic and trade policy uncertainties associated with geopolitical tensions and fragmentation.

It said that while global trade and industrial production are projected to gradually improve in 2024 and 2025, benefiting manufacturing-export-oriented economies, the recovery will be subdued by recent historical standards.

The report noted that global growth in 2023 was driven by better-than-expected performance in several countries.

Significantly, a resilient United States economy defied the expectations of a slowdown, while the recovery in China, while slightly weaker than expected, also provided support for global growth. In both countries, economic growth is projected to moderate in 2024, it said.

The economy in Europe is forecast to experience a mild recovery after sluggish performance in 2023.

Subdued growth in the world’s largest economies, coupled with tight financial conditions, geopolitical tensions and narrowing fiscal space, weighs on the short-term growth prospects of many developing and transition economies, it added.

“Average growth in developing countries is projected to moderate from 4.1 per cent in 2023 to 4.0 per cent in 2024, well below the 2011-2019 average of 4.9 per cent.”

The United States economy is projected to grow by 1.4 per cent in 2024, down from an estimated 2.5 per cent in 2023. Economic growth has been fuelled by robust consumer spending on the back of continuing strength in the labour market, a robust housing market, and buoyant household balance sheets.

In China, the recovery from COVID-19-related lockdowns has been more gradual than expected amid domestic and international headwinds. The economy turned a corner during the second half of 2023, with the growth rate reaching an estimated 5.3 per cent for the year, up from 3.0 per cent in 2022.

“A combination of property sector correction and faltering external demand – weighing on the growth of fixed asset investment, industrial production and exports – is projected to push growth down moderately to 4.7 per cent in 2024.”

While consumption has been a major driver of growth, consumer confidence remains tepid. The Government has implemented various policy measures, including reductions in policy rates and mortgage rates, and has increased public sector investments, financed with new bonds, to stimulate growth, said the report.

Meanwhile, it said Europe faces a challenging economic outlook amid sticky and elevated inflation, high interest rates and geopolitical conflicts. In the European Union, gross domestic product (GDP) is projected to expand by 1.2 per cent in 2024, up from 0.5 per cent in 2023.

The mild recovery is expected to be driven by a pick-up in consumer spending as price pressures ease, real wages rise, and labour markets remain robust, it added.

It said that the continued impact of tight financial conditions and the withdrawal of fiscal support measures will partly offset the effects of these key drivers of growth in Europe.

The report said that in the Commonwealth of Independent States (CIS) region, economic growth in 2023 was stronger than anticipated, reflecting higher-than-expected growth in the Russian Federation, a moderate rebound in Ukraine after a deep contraction in 2022, and strong performance in the Caucasus and Central Asia.

Aggregate GDP for the CIS and Georgia expanded by an estimated 3.3 per cent in 2023 and is projected to grow moderately by 2.3 per cent in 2024, while higher inflation and the resumption of monetary policy tightening in the Russian Federation are expected to weigh on the region’s growth in 2024.

Economic growth in Africa is projected to remain modest, edging up from an estimated 3.3 per cent in 2023 to 3.5 per cent in 2024 as the region is buffeted by the global economic slowdown and tighter monetary and fiscal conditions, said the report.

“Debt sustainability risks will continue to undermine growth prospects. The impacts of the climate crisis are a growing challenge for key sectors such as agriculture and tourism.”

Growth in East Asia is projected to moderate from 4.9 per cent in 2023 to 4.6 per cent in 2024. In most countries, private consumption growth remained firm, supported by easing inflationary pressure and steady recovery in the labour market.

While the recovery in services exports – particularly tourism – has been robust, a slowdown in global demand has held back merchandise exports, which constitute a major engine of growth for many economies, said the report.

In South Asia, GDP expanded by an estimated 5.3 per cent in 2023 and is projected to grow by 5.2 per cent in 2024, driven by a strong expansion in India, which remains the fastest-growing large economy.

Growth in India is projected to reach 6.2 per cent in 2024, slightly lower than the 6.3 per cent estimated for 2023, supported by robust domestic demand and strong growth in the manufacturing and services sectors.

It said tight financial conditions and fiscal and external imbalances continue to cast a shadow over the outlook for several economies in South Asia.

In Western Asia, GDP growth is forecast to increase from an estimated 1.7 per cent in 2023 to 2.9 per cent in 2024 amid the growth recovery in Saudi Arabia and the robust expansion of non-oil sectors.

High prices of essential food imports continue to drive up inflation, which is projected to decline only gradually in 2024.

The report said the outlook in Latin America and the Caribbean is challenging. Growth is slowing, inflation is receding but remains elevated, and structural and macroeconomic policy challenges persist.

In 2023, growth was stronger than anticipated amid resilient consumption and investment, robust capital inflows, and solid external demand. Regional GDP expanded by 2.2 per cent, slightly above the 2010-2019 average of 1.7 per cent.

In 2024, regional GDP growth is projected to slow to 1.6 per cent as tighter financial conditions impact domestic demand and slower growth in the United States and China constrains exports.

In the least developed countries (LDCs), GDP is projected to grow by 5.0 per cent in 2024, up from an estimated 4.4 per cent in 2023 but still well below the 7.0 per cent growth target set in the SDGs, said the report.

Investment in the LDCs remains subdued, and volatile commodity prices – especially for metals, oil and cotton – continue to affect growth prospects, with 38 out of 46 economies being commodity dependent.

External debt service is estimated to have increased from $46 billion in 2021 to approximately $60 billion in 2023 (about 4 per cent of combined GDP for the LDCs), further squeezing fiscal space.

Small island developing States (SIDS) benefited from a strong rebound in tourism inflows in 2023 and have a largely positive outlook for 2024. Average growth is projected to accelerate from 2.3 per cent in 2023 to 3.1 per cent in 2024, said WESP 2024.

However, it said the economic prospects for SIDS remain vulnerable to the increasing impacts of climate change and to fluctuations in oil prices, which directly affect tourism flows and consumer prices.

Economic growth in landlocked developing countries (LLDCs) is projected to accelerate from an estimated 4.4 per cent in 2023 to 4.7 per cent in 2024, it added.

PROTRACTED PERIOD OF LOW GROWTH LOOMS

WESP 2024 said the world economy avoided the worst-case scenario of a recession in 2023, but significant risks and uncertainties persist.

It said given the subpar growth prospects, most developing countries will fail to recoup the output lost during the pandemic and the recent global and regional shocks.

In 2023, the cumulative output losses – calculated as the sum of the annual difference between pre-pandemic projections of GDP and actual GDP – amounted to about 40 per cent of the 2019 GDP in the SIDS and about 30 per cent in the LDCs.

In comparison, the developed economies saw a cumulative loss of only about 10 per cent of the 2019 GDP.

Among the developing regions, Africa and South Asia experienced the largest cumulative output losses in 2023 as conflicts, natural disasters, and economic crises impeded full recovery in many countries in these two regions.

The report underlined that inflation remains a key policy challenge, saying that after surging for nearly two years, global inflation eased significantly in 2023 but remained above the 2010-2019 average and central bank targets.

“Global headline inflation fell from 8.1 per cent in 2022, the highest value in three decades, to 5.7 per cent in 2023,” it said, adding that a further decline to 3.9 per cent in 2024 is projected as international commodity prices moderate and higher interest rates continue to weigh on global demand.

The report said that although most commodity prices declined to pre-Ukraine war levels in 2023, they remained considerably higher than before the pandemic.

It said that international food prices have been on a downward trend since mid-2022 and continued to decrease slightly during the first three quarters of 2023, while fuel prices fell below pre-Ukraine-war levels.

“Despite the recent trends, considerable inflation risks persist, adding pressure on central banks to keep monetary policy tight.”

WESP 2024 said new supply shocks in global commodity markets – arising from the ongoing war in Ukraine or the conflict in the Middle East – could push up energy and grain prices, while additional export restrictions by major producers could limit supply in global markets.

Since the onset of the war in Ukraine, export restrictions on food and fertilizers have increased, it noted.

“Moreover, climate-related shocks, including heatwaves, droughts and floods, threaten to impact crops, adding pressure on food prices.”

In developed countries, average headline inflation decelerated from 7.8 per cent in 2022 to 4.8 per cent in 2023 and is projected to slow further, to 2.8 per cent, in 2024, said WESP 2024.

In developing countries, average headline inflation is projected to decline from an estimated 6.9 per cent in 2023 to 5.6 per cent in 2024, while inflation rates are expected to fall in Africa, Western Asia, and Latin America and the Caribbean in 2024 but will remain well above the 2010-2019 average.

Higher food prices often exacerbate food insecurity for the poor, though the impact depends on local conditions and existing vulnerabilities, said the report.

Countries that were already grappling with food crises before the pandemic and the war in Ukraine have been hit hardest by the high food prices of the past two years, it added.

It said that rising food expenses have driven up the cost of living for households, thereby reducing real incomes -especially in developing countries, where the share of total consumer expenditure allocated to food is higher than in developed economies.

It added that higher inflation has undermined progress in poverty reduction during the post-pandemic period.

According to World Bank estimates, the combined effects of the pandemic, the war in Ukraine, and the global energy and food price shock pushed an additional 75 million to 95 million people into extreme poverty in 2022 relative to pre-pandemic baseline forecasts.

Globally, 691 million people were estimated to be living in extreme poverty in 2023 – only 13 million less than in 2022.

It said while global poverty marginally declined in 2023, progress has been highly uneven. Average poverty rates in upper-middle-income, high-income and lower-middle-income countries moved closer to pre- pandemic levels.

In contrast, poverty rates were still well above pre-pandemic levels in low-income countries, particularly those in Africa and the Middle East.

“Without significantly faster economic growth and targeted measures for supporting livelihoods and enhancing social protection, poverty alleviation will remain elusive in many low-income countries.”

The rebound in the global labour market since the pandemic has been swifter than its recovery from the global financial crisis of 2008. In many countries, unemployment rates fell below pre-pandemic levels in 2023, it said.

However, it said labour market recoveries diverged considerably between developed and developing countries, while lower real incomes remained a challenge worldwide as nominal wage growth often lagged behind inflation.

In 2024, slowing economic growth is expected to weigh on employment prospects in many regions, it added.

The report also said investment is expected to remain subdued globally.

“Rising borrowing costs and heightened economic and geopolitical uncertainties will continue to have a negative impact on business and consumer confidence and prompt private firms to scale back their investment plans.”

At the same time, high debt burdens, rising interest expenses and dwindling fiscal space are constraining public investment, it added.

“Global investment growth, measured as the annual growth in real gross fixed capital formation, is estimated to have slowed from 3.3 per cent in 2022 to only 1.9 per cent in 2023.”

While mild improvement is projected for 2024, global investment growth will remain significantly below its 2011-2019 trend growth rate of 4 per cent, said the report.

The slowdown in investment growth in 2023 mainly reflected weaknesses in developed economies. Residential investment fell significantly in most economies amid rising interest rates and construction costs.

Investment has been more resilient in developing economies than in developed economies. Investment in South Asia, particularly in India, remained strong in 2023, said the report.

The report said India is benefiting from growing interest from multinationals, which see the country as a key alternative manufacturing base in the context of developed economies’ supply chain diversification strategies.

Growth in global trade was very weak in 2023. International trade in goods and services is estimated to have increased by only 0.6 per cent, far below the 5.7 per cent growth rate achieved in 2022, it added.

It said while trade growth is projected to accelerate to 2.4 per cent in 2024, driven by a recovery in merchandise trade, it will likely remain below the average pre-pandemic rate of 3.1 per cent registered for the period 2015-2019.

“The overall weakness in global trade in 2023 is mainly due to the slump in merchandise trade. The growth of trade in goods is estimated to have remained in negative territory for most of the year.”

In contrast, trade in services continued to recover from the pandemic-induced downturn, with travel services driving the growth.

Slowing global demand, unresolved trade tensions between the largest trading partners, and geopolitical conflicts are affecting trade flows in the short term.

The war in Ukraine and sanctions imposed on the Russian Federation have also shaped global trade patterns, said WESP 2024.

“In the longer run, national and economic security considerations as well as geostrategic rivalries are likely to reshape global supply and value chains.”

Among developed economies, some reshoring and friend-shoring of manufacturing and production facilities are starting to take place, it added.

A recent European Central Bank survey indicated that a growing number of large firms operating in the euro area intend to relocate operations within the European Union, citing nearshoring, friend-shoring and diversification as the rationale.

However, moving production away from the most efficient producer would increase costs in the near term, and there is still a higher proportion of euro area companies expecting to move production out of rather than into the European Union, said the report.

In the United States, imports from China have in recent years been partly replaced by imports from other trade partners, notably ASEAN member countries, the European Union, Mexico and Canada, it added.

The report also said that despite significant monetary tightening during 2022 and 2023, international financial conditions remained moderately benign amid rising equity prices and low volatility.

WESP 2024 said at the same time, however, long-term borrowing costs continued to increase for most of the year – reaching the highest level in over a decade in the United States and Europe – amid higher central bank policy rates, quantitative tightening, and the large borrowing needs of Governments.

“The possibility of renewed inflationary pressures and further monetary tightening in the United States and Europe could trigger a sharp repricing of risks and sudden spikes in financial volatility,” it cautioned.

POLICY CHALLENGES

Central banks worldwide will continue to face a delicate balancing act and difficult trade-offs in 2024 as they endeavour to manage the risks to inflation, growth and employment, and financial stability, said the report.

“Policy uncertainties – particularly those surrounding the monetary stance of the United States Federal Reserve and the European Central Bank – loom large for both the real economies and the financial markets.”

Central banks in developing economies will also be confronted with increasing balance-of-payments concerns and debt sustainability risks, it added.

While a growing number of central banks are expected to shift towards monetary easing to support aggregate demand, their policy choices will largely be conditioned by actions undertaken by the Federal Reserve and the European Central Bank.

Although the main developed country central banks are likely at the peak of the tightening phase, it is unclear whether they will begin to cut interest rates in 2024, it said, adding that monetary policy stances will remain largely restrictive worldwide pending interest rate cuts by the Federal Reserve and the European Central Bank.

Given the policy challenges, the report said it remains difficult to predict the trajectories of monetary policy in the United States and Europe and determine a turning point in the global monetary cycle.

“Until inflationary pressures abate further, financing conditions are projected to remain tight in all but a small number of countries, including China.”

The report further said that fiscal space is shrinking amid higher interest rates and tighter liquidity. Countries implemented bold and timely fiscal policy measures to stimulate recovery from the pandemic crisis.

Governments also relied on fiscal policy to cope with higher food prices and food insecurity risks resulting from the war in Ukraine.

It said the sharp increases in the interest rate since the first quarter of 2022 and the tighter liquidity conditions have impacted fiscal positions worldwide, renewing concerns about fiscal deficits and debt sustainability.

“Fiscal space remains very limited in most countries, restricting the capacity of Governments to respond to new shocks, particularly in developing countries.”

The report said that market expectations that interest rates in major economies will remain higher for longer than previously anticipated have led to a rise in sovereign bond yields, adding pressure on fiscal balances.

“In the medium term, subdued growth prospects, together with the need for increased investment in education, health and infrastructure, will put pressure on government budgets and exacerbate fiscal vulnerabilities.”

The fiscal positions of most developing economies are fragile. In many cases, higher debt levels and borrowing costs are accompanied by subdued growth prospects and subpar domestic resource mobilization, it added.

WESP 2024 said the ongoing rise in interest payments is increasingly diverting resources away from spending on health, education, social protection, and other areas of sustainable development.

In 2022, more than 50 developing economies spent over 10 per cent of total government revenues on interest payments, and 25 countries spent more than 20 per cent, it noted.

It said that at the mid-point of the implementation of the 2030 Agenda for Sustainable Development, the world remains vulnerable to disruptive shocks, including a rapidly unfolding climate crisis and escalating geopolitical conflicts.

The urgency and imperative of achieving sustainable development underscore that stronger global cooperation is needed now more than ever, it said.

The United Nations remains at the forefront of efforts to strengthen multilateralism to support SDG progress, it emphasized.

The report said that in the context of the macroeconomic challenges identified, priority areas for international cooperation include strengthening the multilateral trading system, reforming development finance and the global financial architecture and addressing the debt sustainability challenges of low- and middle-income countries, as well as massively scaling up climate financing.

(This article was published in SUNS #9926 on 16 January 2024)