13.10.23 Review

The Post-COVID-War Syndrome: inflation and geopolitics weigh heavy on the global economy

The post-pandemic recovery of the global economy has slowed down, and growth forecasts for the coming years have been downgraded. This is a consequence of the inflationary shock of 2022, compounded by Russia's invasion of Ukraine and the ensuing sanctions war. Tightening monetary policies are putting pressure on markets, but inflation is receding slowly. Time and again, China, which was once expected to overtake the United States as the world's economic powerhouse, has failed to live up to those expectations. Economists are now casting doubt on whether China will ever surpass the United States. The global economy is projected to grow at a rate of approximately 3% in the coming years, down from the 3.8% average seen between 2000 and 2019, according to the International Monetary Fund (IMF). However, there is some good news: the likelihood of a recession in Europe has sharply decreased. Nevertheless, there are still risks. These may materialise in the event of an inadequate response from monetary authorities to the existing challenges or the emergence of new geo-economic fragmentation. Estimates for the Russian economy vary. The IMF is more optimistic, aligning closely with the Russian government's outlook, expecting a growth of 2.2% this year but anticipating a sharp slowdown to 1% thereafter. The World Bank and the Peterson Institute forecast growth of around 1.5% for this year and 1.2-1.3% next year, largely in line with the forecasts of the Russian Central Bank.

The recovery of the global economy following the recession caused by the COVID-19 pandemic has decelerated and is expected to slow down further in the coming year, according to experts at the IMF and the Peterson Institute for International Economics. Both organisations predict that, in 2023, global GDP is projected to grow by a maximum of 3%. The forecast for 2024 is slightly worse, with the IMF anticipating a growth of 2.9% and the Peterson Institute 2.8%. Neither value deviates much from the earlier predictions made by these organisations, but while they once expected growth to accelerate, albeit at a modest rate, they are now talking of a 'soft landing.' The IMF's medium-term forecast suggests that the global economy will grow at an average annual rate of 3.1%, compared to 3.8% in 2000-2019.

The main reason for this slowdown is the inflationary shock of 2022, which was a result of liquidity, a matter exacerbated by Russia's full-scale invasion of Ukraine and the sanctions war. Central banks responded to the shock with a tightening of monetary policies. Despite this, inflation is still falling slower than one might expect. It is expected to average 6.9% by the end of 2023 and 5.8% in 2024. Moreover, the forecast for the next year has been raised by 0.6 percentage points. Developed countries (excluding Japan) are preparing to cut interest rates, with a few developing countries, such as Brazil and Chile, already implementing rate reductions. In general, global GDP in 2023 will be 3.4 percentage points lower than the level predicted for 2023 before the pandemic.

In 2023, developed economies are projected to grow by a mere 1.5%, following 2.6% in a challenging 2022. Growth is expected to slow down to 1.4% in 2024. According to the IMF experts, the post-pandemic recovery in the service sector is nearly complete, with the tourism industry, for example, having already returned to pre-pandemic levels. However, the industrial sector is recovering more slowly due to shifts in consumption toward services (a legacy of the pandemic), rising living costs, the withdrawal of crisis support measures, high interest rates, and geopolitical tensions. Nevertheless, the United States and Europe are experiencing these dynamics differently. According to the IMF, American GDP in 2023 will exceed pre-pandemic levels, albeit by a fraction of a percent, whereas the Eurozone is expected to lag behind by 2.2 percentage points. European economies, which were heavily reliant on Russian energy resources in the past, have suffered more from rising prices, the IMF experts explain.

The recovery in other developed and developing countries has been even more sluggish, with low-income nations falling behind pre-pandemic forecasts by 6.5%. Developing countries are expected to grow by 4% in 2023, followed by a slight deceleration of growth in 2024. The situation would have been better had China's growth remained robust. At the beginning of the year, experts expected it to make a significant contribution to the dynamics of global GDP. Growth forecasts for 2023 and 2024 have been downgraded due to the crisis in the real estate market, which has been the driving force of the Chinese economy for many years. IChina's growth might reach 5% in 2023, slowing down to just 4.2% in 2024. Thus, it seems that China is gradually relinquishing its role as the global economic locomotive, as forecasts are increasingly having to be adjusted, as a result of the overinflated expectations for Chinese growth. Analysts from Bloomberg Economics now believe that China is unlikely to ever surpass the United States. Before the pandemic, they predicted it would happen in the early 2030s. According to new projections, China may briefly catch up to the US in the mid-2040s, only to fall behind again. In India, the world's second-largest developing economy, growth rates are decreasing as well, but at a more gradual rate.

A slowdown in growth is not the worst-case scenario, but it is not the best case either. Earlier this year, experts from the Peterson Institute suggested that a recession in the US and Europe has likely been averted. However, in their most recent report, they note that the risk remains and they describe three scenarios in which it could materialise.

Demand, particularly in the US, may turn out to be higher than expected, given the high levels of savings and income growth due to reduced unemployment. In this case, the Federal Reserve would have to tighten monetary policies to combat inflation. A recession in Europe, weak dynamics in China, and problems in the American banking sector could lead to a significant reduction in demand if the financial authorities fail to lower interest rates in time. This, too, could result in a recession. Thus, problems may arise from both excessive and weak demand. Finally, the intensification of global economic fragmentation could drive up prices for energy resources, food, and other commodities. Re:Russia has outlined this scenario, discussed in detail in the latest IMF report, elsewhere. The Peterson Institute experts say this scenario is particularly challenging for the Federal Reserve and other regulators. They would have to raise rates to slow inflation, which would be caused not by overheated demand but by a shortage of resources.

The IMF has raised its estimate for Russia's GDP for 2023 from 1.5% to 2.2%. In 2024, growth may reach 1.1%. The Peterson Institute projects this growth to be 1.4% and 1.2%, respectively. The World Bank, in its new report on Europe and Central Asia, offers similar figures: 1.6% and 1.3%. By 2025, the growth is expected to drop below 1%. The main reason for this slowdown is the stringent credit and monetary policy that the Central Bank must adhere to in order to reduce inflation in the face of high government expenditures. When planning the budget for 2024, the Russian authorities assessed the prospects of the economy much more optimistically. However, Russian economists and international organisations are more closely aligned in their predictions. Nonetheless, all experts agree that forecast accuracy will remain low as long as the war continues, but at the same time they believe that their predictions will have to be adjusted downwards.