The two powerful shocks to the global economy — the pandemic-related crisis of 2020 and the Russian full-scale invasion of Ukraine, which triggered a surge in energy prices — did not lead to a recession in the global economy, or even widespread stagnation as experts and think tanks had feared. Already last year, forecasters shifted their estimates from 'recession' to 'soft landing', and a report published in April by the International Monetary Fund (IMF) was titled 'Steady but Slow' - referring to global economic growth.
The main threat to the global economy caused by the shocks of the early 2020s was an inflationary wave that began to build as the pandemic waned and peaked after the cessation of Russian gas supplies to Europe. Between 2013 and 2020, global inflation held fairly steady at 3.2%, but accelerated to 4.7% in 2021 and soared to 8.7% in 2022, reaching a twenty-five-year high. In 2023, it fell to 6.8%, and this year the IMF expects it to slow to 5.9%. This rate of decline can be considered slow. However, this slowness also has a downside.
The inflationary wave forced central banks around the world to raise interest rates, and it was assumed that this would send the global economy into recession or at least into prolonged stagnation. However, it turned out that high rates have a much smaller negative impact on the economy. According to Bloomberg's forecast, most central banks will begin to lower rates, but the pace will be slow. The average cost of borrowing in developing countries by the end of the year may decrease by 1 percentage point. This is less than the increase seen last year. Overall, since mid-2021, when the upward cycle began, growth has amounted to 4.4%.
Thus, analysts predict three slow processes for the next few years: a slow decline in inflation, slow decline in interest rates and slow global economic growth. IMF experts expect the latter to grow by 3.2% in both 2024 and 2025. And, in general, in the period 2020-2029 the average rate of global growth will be, according to their forecasts, 2.9% compared to 3.8% in 2010-2019. However, they believe that if we exclude the years 2011-2012, when there was a recovery from the crisis of 2008-2009, and two crisis years of the early 2020s, the global economy in the 2020s will be on roughly the same track as in the 2010s. The forecast from The Peterson Institute for International Economics for the next two years for the global economy is about the same as the IMF's: 3.1% in 2024 and 3.2% in 2025.
One of the reasons for the subdued effect of the rate increase on growth rates is the high consumer activity in a number of major economies. This effect was particularly evident, for instance, in the United States. Unlike the EU, which continues to balance on the brink of recession (with growth of a modest 0.3% expected in 2024 after 0.4% in 2023), the American economy grew by 2.5% in 2023, and according to forecasts by the IMF and the Peterson Institute, it may accelerate to 2.7 or 2.8% in 2024 (at the end of last year it was expected to be around zero). Consumer spending at the end of last year accounted for more than half of the total GDP growth. Households are spending the savings accumulated during the pandemic and, on average, have more funds than before. Additionally, the potential of the American economy has been significantly boosted by a surge in immigration and labour productivity growth.
As for the Russian economy, in the eight years prior to the war (2014-2021), its growth rate was almost three times lower than the global average: 1.1% versus 3.1%. In the new reality of war and sanctions, according to the IMF, the Russian economy in 2022-2029 will also lag behind the global one, although with a slightly smaller, twofold gap: 1.6% versus 3.2%. However, this will only be possible if oil prices do not fall or if nothing unforeseen does not happen. In 2024, Russian growth will still be very strong at 3.2%, but will then start to return to its long-term trajectory (1.3%). Traditionally, a more restrained forecast is given by the World Bank. In its report dedicated to the countries of Europe and Central Asia, the forecast for Russia for 2024 is 2.2%, and for 2025 it is 1.1%. All analysts note that the Russian economy is growing ahead of its potential due to unprecedentedly high budget expenditures. At the same time, Russia is experiencing all of the above-mentioned phenomena typical of the global economy: an inflationary surge, high interest rates that have a weak impact on growth rates, and a surge in private consumption.
The growth of expert optimism regarding the global economy in early 2024 is also due to the fact that the second threat — that of geo-economic fragmentation of the global economy, which was the focus of the IMF's autumn forecast, has not yet materialised. The trend of possible fragmentation emerged back in the 2010s, fuelled by the trade war between the US and China during Trump's presidency, and then by pandemic and war. In a new study, the IMF experts compare the situation to the early Cold War period. To assess the dynamics of mutual trade, they divided countries into three groups: 'Western bloc', 'Eastern bloc' (the core of which is China and Russia) and non-aligned countries.
The analysis showed that after the start of the war, trade volumes and the number of foreign direct investment announcements between the countries of the politically opposing blocs decreased by 12% and 20%, respectively. But, at the same time, trade and investment flows between the blocs and 'neutral' countries increased. The decline in mutual trade was almost synchronously compensated by the growth of trade chains through intermediary countries (connectors), among which the main beneficiaries of this reconfiguration were, as we have previously written, India, Vietnam, Indonesia, Morocco, Mexico and Poland (→ Re:Russia: Beneficiaries of Reconfiguration). All of them are rapidly increasing investment in new production facilities, importing components from China and exporting finished products to the EU and the US. It is true, however, as the authors note, that in the past — in the late 1940s and early 1950s — the noticeable effect on world trade occurred approximately five years after the start of the Cold War. At the same time, there were no damping mechanisms like connectors back then.
Although the reconfiguration of globalisation, as now believed, is unlikely to slow down the world economy, its geo-economic and geopolitical consequences could be very serious. The main beneficiary of this will be India. While the IMF forecast expects China’s growth to slow further from 5.2% in 2023 to 4.6% in 2024, and 4.1% in 2025, India has reached an annual growth rate of 6.5-7.5%, more than double the global rate. In 2023, the Indian economy grew by 7.8%, in 2024 growth will slow to 6.8%, and in 2025 it will be 6.5%, according to IMF experts. The Peterson Institute provides estimates for the same years in the range of 6-7.4%.
According to the experts at the IMF, these figures are determined by two fundamental factors: strong domestic demand and a growing working-age population. Their colleagues at the Peterson Institute also note the contribution of India's reforms aimed at reducing state regulation of the economy and 'friendshoring' - the ability to gradually absorb Western manufacturing and investment leaving China (→ Re: Russia: Subsidiary Competition). These factors will continue in the medium term, making India, rather than China, the main driver of global economic growth by 2028, according to Bloomberg Economics. India's growth rate will accelerate to 9% in 2028, while China's will slow to 3.5%. However, given that the Chinese economy today is five times larger than India's, India will only be able to 'catch up and overtake' China in the very distant future.
Nevertheless, the new role of India and some other connectors is likely to mean the gradual decline of the 'Chimerica' phenomenon — the close interaction and interdependent growth of the US and China — which played such a significant role in the global economic landscape of the 2000s and early 2010s. That said, the overall effect of the trade and economic conflicts of the past five years has turned out to be directly opposite to what forecasters feared last year. Economic globalisation has reached such a level that even a conflict between its flagship nations cannot lead to a reversal of the general trend.