With Halloween’s approach, economic risks, like elusive ghouls and spectres, cast a shadow over the global economic landscape. As the world readies its costumes and embraces the supernatural, the economic realm grapples with its own distinct set of hair-raising challenges.
The world economy is gradually recuperating from the aftereffects of the pandemic, the war in Ukraine and the surging cost of living. Despite the upheaval in energy and food markets due to the war and substantial tightening of monetary policies worldwide to tackle the highest inflation in decades, the global economy has decelerated but not grinded to a halt. In retrospect, its resilience is noteworthy. Nevertheless, growth remains slow relative to historical averages and varied, emphasising global economic disparities.
The International Monetary Fund’s (IMF) latest economic projections in its October 2023 World Economic Outlook have become increasingly consistent with a soft-landing scenario, intimating that authorities will be able to tame inflation without inflicting heavy damage on the world’s growth profile. However, concerns regarding global inflation and recession remain high, reflecting the still challenging environment.
Risks haunting the world
Peering into the crystal ball, we unveil the following tricks as prominent downside economic risks haunting the world this season:
• Ghosts of inflation past: Labour markets operating at full capacity and wage demands aimed at offsetting prior cost-of-living pressures might add to the lingering presence of underlying inflationary pressures. Moreover, surplus household savings in select economies could dampen the impacts of monetary policy tightening on inflation.
• A chilling escalation in the Israelian-Palestinian war: The ongoing conflict between Israel and Hamas has the potential to entangle neighbouring nations in the Middle East. Additionally, it could exacerbate inflationary pressures and, in the worst-case scenario, lead to a global economic recession.
• The dragon’s slumber: The extent of China’s growth slowdown will predominantly hinge on how the Chinese government addresses the escalating strain on local government finances. If worries about financial stability persists in China, this could resonate across other emerging market economies, manifesting as fluctuations in exchange rates and disrupting capital flows.
• Spells of volatile commodity prices: In the absence of technology and supply-side interventions, an increasingly hostile future exists for agricultural commodities and raises food security risks worldwide. Similarly, a decrease in oil supply or a growing fragmentation in global economic ties could trigger a surge in oil prices or disrupt global supply chains, dampening economic activity and raising inflation outcomes.
• Eerie whispers of a repricing in financial markets: Should inflation stresses be revived, there would be a need to reconsider monetary policies, potentially causing a sudden surge in expected interest rates and a decline in asset values. Such shifts could further tighten financial conditions, putting pressure on financial entities with delicate balance sheets that are susceptible to interest rate fluctuations.
• Debt demons loom: Elevated borrowing costs for developing economies remain high, which could limit essential government spending and raise these countries’ vulnerability to debt distress.
• Fractured frontiers: The fragmentation of nations into blocs engaging in exclusive trade might hinder worldwide economic expansion. Escalating geoeconomic tensions have the potential to impede collaborative efforts in addressing global socioeconomic challenges.
Handful of treats
While global risks maintain a downside bias, there are a handful of treats or potential positive developments that the international economy may still experience. These include:
• A tasty inflation treat: A compression in corporate margins could absorb an increase in costs. A more advantageous inflation trajectory could restore the buying capacity of households and enable central banks to expedite policy easing.
• A resurrection of domestic demand: Tighter-than-anticipated labour markets, coupled with a surplus of pandemic-induced savings yet to be utilised, could bolster consumption.
• The potion of productivity: A fresh productivity surge, partly propelled by advancements in artificial intelligence, could amplify investment and enhance economic growth prospects.
Measures to mitigate menacing macro risks
As the spookiest night of the year approaches, the global economy is traversing a haunted mansion of macro risks. With persistent high underlying inflation and limited fiscal room due to soaring government debt, the IMF underscores the importance of prioritising supply-boosting reforms to mitigate these menacing macro risks. These measures encompass a sustainable return of inflation to target levels, harmonised coordination of monetary and fiscal policies to bolster the credibility of disinflation strategies embraced by authorities, vigilant monitoring of strains in global financing conditions and a readiness to deploy essential financial stability tools to contain market stress.
Additional measures include enhancing the supervision of financial markets, mitigating the risk of escalating debt distress, coordinating efficient debt resolution, improving labour force mobility, implementing pivotal macrostructural reforms to address critical constraints on economic activity and strengthening international collaboration.