12.01 Review

Nothing Good: The past four years have taught everyone to assess Russia’s economic prospects with restrained pessimism — everyone except Putin

A 'soft landing' for the global economy, which was considered a pessimistic outlook last year, now appears rather optimistic at the beginning of this year. The World Bank considers it the most likely scenario, although it has lowered the forecasts for most major economies. Similar expectations are shared by most major investment houses. Along with still-high inflation, which central banks are grappling with by keeping interest rates high, the risks to growth in 2024 are created by a high level of political uncertainty. Elections will be held this year in the US, EU, India and dozens of other countries. Contrary to expectations, the Chinese economy has not become the engine of global growth. The American economy, under tight monetary and credit policies, is demonstrating better results than expected. At the same time, Europe is teetering on the brink of recession. Risks for the 'soft landing' scenario are posed by the threat of a new wave of inflation, which could be caused by the defeat of Ukraine or Israel entering into an armed conflict with Hezbollah in Lebanon. Against this backdrop, the Russian government's forecasts appear surprisingly optimistic, expecting the economy to grow by 2.3% in 2024 — after almost 4% growth in 2023. The World Bank, like the Russian Central Bank, assesses its prospects much more modestly, expecting growth of no more than 1.5%. After the economic recovery of last year, growth has been constrained by tight monetary and credit policies, constraints on production capacity and labour shortages.

Global economic growth in the first half of the 2020s could be the weakest in 30 years,warns the World Bank in its January report ‘Global Economic Prospects’. In 2024, growth is expected to be 2.4%, after +2.6% in 2023 and +3% in 2022 (similar estimates can be found in the forecast of S&P Global Market Intelligence: +2.3% in 2024). Thus, growth rates in 2024 will decrease for the third consecutive year. In 2025, growth of 2.7% is expected. By comparison, the world economy grew at an average annual rate of 3.1% in the 2010s, and 3% in the 2000s. 

At the end of last year, leading analytical centres predicted a likely 'soft landing' scenario (slowing growth, but not recession). Prior to this, the World Bank, the International Monetary Fund, and the Peterson Institute for International Economics had hoped for economic acceleration. However, the apocalyptic forecasts for the first half of 2022 did not materialise either: the global economy grew at an average rate of 2.8% in 2022-2023 against 3% in 2017-2019. The price shock in the energy and food markets proved to be short-lived, and the war in the Middle East did not have any significant impact on the global economy either. Experts attribute responsibility for the inflationary wave to an equal extent to the price shocks in 2022 and the consequences of governments' fight against the coronavirus crisis in 2020-2021.

Alongside high inflation, which central banks are fighting by keeping interest rates high, the unprecedented high level of political uncertainty threatens growth this year. In 2024, there will be presidential elections in the US and elections to the European Parliament. In addition, elections at various levels will be held in dozens of other countries, including India, Mexico and Indonesia. 

GDP dynamics of the US, EU, China, Russia and globally, 2000-2024, %

Compared to the June version of the World Bank report, estimates and forecasts for most regions have worsened. The exception is the United States. The exception is the United States. In 2023, the American economy grew by 2.5%, although back in June it was expected to grow by 1.1%. The forecast for 2024 has been raised from 0.8% to 1.6%. The unemployment rate was falling last year, wages were rising, and citizens were actively spending savings accumulated during the COVID-19 pandemic. However, by the end of last year, the impact of this factor began to weaken, and unemployment began to rise. The dynamics of consumer activity will largely determine the state of the US economy: Bloomberg highlights that private consumption provides two-thirds of US GDP. At the same time, despite the easing of monetary policy, bank interest rates remain high. Businesses in the US, according to the World Bank’s forecast, will also reduce activity due to uncertainty regarding the upcoming presidential elections and rising costs (old loans have to be refinanced at higher rates). 

The most important factor in the global economic slowdown has been the slowing pace of growth in China. After three decades of 10% growth from 1980 to 2000, China slowed to 7% in the 2010s, and is moving towards a benchmark of 4.5% in the early 2020s. In 2023, China's GDP grew by 5.2%, the World Bank expects 4.5% in 2024 and 4.3% in 2025. Both forecasts have been downgraded by 1 percentage point. The property sector, which used to be the flagship of the Chinese economy, is stagnating. The financial support provided by the authorities prevented a major crisis, but the threat of crisis persists in the absence of new cash injections. This is the biggest risk for the Chinese economy in 2024, warns Bloomberg.

Meanwhile, infrastructure investment has not recovered to pre-pandemic levels. External demand is not providing support. The geopolitical competition between the government of Xi Jinping and the US is causing Western investors and global companies to redirect their focus to other Southeast Asian countries with cheaper labour. Consumer activity, although somewhat revived at the end of last year, remains low. At the same time, a new bubble may be inflating in China, the Atlantic Council points out that amid weak domestic and external demand, credit to the industrial sector is rising sharply. The excessive state influence on economic decision-making may play a bad joke on its economy.

Conversely, among major economies, China's regional rival, India, is faring the best. The World Bank predicts that its GDP will grow by 6.4% in 2024 and 6.5% in 2025. From the early 1980s to the late 2000s, the Indian economy grew at a rate of around 6% per year. In the 2010s, the growth rate increased slightly to 6.6%. This year, the growth of the Indian economy will be supported by government spending ahead of parliamentary elections. However, due to growing geopolitical tensions, the reorientation of investors from China to India may intensify.

India has tremendous labour potential, but not enough capital to tap it. Unemployment stands at 10%, with less than 60% of women participating in the economy. In 2023, India achieved a symbolic victory over China, surpassing it in population size. Economists hope that India will become the engine of global economic growth in the 2020s. In 2023, according to the International Monetary Fund, India's contribution to global GDP growth was 15%, compared to 14% for Western countries and 35% for China.

The situation in the EU remains difficult. Its largest economy, Germany, ended the year in recession. Six months ago, it was assumed that the Eurozone's GDP would grow by 1.3% and 2.3% in 2024-2025, respectively. The new forecast has been lowered to +0.7% and +1.6%, after a growth of 0.4% in 2023. Overall, the EU has managed to suppress inflation, which was above 10% at the start of 2023 but dropped to 3% by November. However, tight monetary policy, designed to curb inflation, continues to restrain business activity, especially in the manufacturing sector, and household spending. Meanwhile, the European Central Bank does not intend to ease it until the medium-term target of 2% is achieved.

In Russia, the World Bank predicts growth of 1.3% and 0.9% for 2024 and 2025, respectively, while estimating growth for 2023 at 2.6%. However, Russian authorities consistently overstate the achievements of the Russian economy. In late December, President Putin announced that the economy grew by 3.5% in 2023, leading the Ministry of Economic Development to revise its own estimates for economic growth for the 11 prior months from 3.3% to 3.5%. However, a new revision took place in early January. Now Putin claimed that the economy contracted not by 2.1% but by 1.2% in 2022, and in 2023, it grew by 4%. All this was necessary to declare that by the end of 2023, the Russian economy had become the largest in Europe, surpassing Germany's GDP in purchasing power parity. In this situation, it is difficult to take government forecasts for 2024 seriously (the Ministry of Economic Development currently predicts 2.3%). The Central Bank's forecast indicates a range of 0.5-1.5%, while the consensus forecasts of the Central Bank and the Higher School of Economics Development Centre predict 1.3-1.4%. Further growth of the Russian economy after recovery in 2023 is limited by tight monetary policy, a shortage of production capacity, and a labour shortage

The Economist, in its issue dedicated to trends in 2024, calls the 'soft landing' of the global economy the most favourable possible scenario. The Economist warns that it may not be possible to reduce inflation to 2% (a goal that the financial authorities of the US, the EU and other Western countries are striving for) without avoiding an economic downturn. First, labour markets look too overheated, with nominal wage growth too high. At the same time, oil prices remain quite high, thanks to artificial supply cuts and geopolitical risks. These factors point to the danger of a 'second wave' of inflation. In such a situation, central banks are unlikely to cut rates (although they may refrain from raising them). There is a possibility that the world economy has entered an era of high rates, which will last for a relatively long time. 

The threat of a new inflationary shock has also been discussed by Bloomberg. It could be triggered by the defeat of Ukraine if US and European aid packages are not accepted soon, as well as by the escalation of conflict in the Middle East if Israel enters into armed conflict with Hezbollah in Lebanon, as demanded by some members of the Israeli government. Similar expectations are held by most of the major investment firms surveyed by Bloomberg. Although a global recession in the second half of the year is not ruled out, the baseline scenario is a slight slowdown.