Beware the New Consensus on the Global Economy

CAMBRIDGE – In the run-up to 2023, the outlook for the global economy appeared bleak. Analysts predicted that Russia’s invasion of Ukraine and the subsequent surge in energy prices would trigger a significant economic downturn in Europe. Bloomberg Economics proclaimed that there was a 100% probability that the United States would suffer a recession. Few believed that most developing economies could withstand the combination of rising energy prices, soaring interest rates, and a downturn in developed countries.

Had forecasters anticipated the war between Israel and Hamas and its potential for regional escalation, the intensification of the Russia-Ukraine war, and political turbulence in some Western countries, their pessimism would have been even more pronounced. Moreover, the extraordinary volatility in the US Treasury market, a key benchmark for numerous domestic and international markets, would have fueled fears about a looming global recession, as would have US bank failures.

But while the past year’s unforeseen political, geopolitical, and market upheavals should have further dampened the world’s growth outlook, the global economy surprised on the upside. The vast majority of developed economies defied expectations, successfully avoiding economic contraction. Developing countries as a whole avoided financial distress. Even China, despite its disappointing growth, showcased the resilience of its economy as the year drew to a close.

These encouraging trends have prompted analysts to adopt an optimistic outlook for 2024. Instead of a recession, the consensus forecast now is that the US economy is headed for a “soft landing,” with disinflation paving the way for interest-rate reductions. Europe, having bolstered its energy reserves and restructured supply chains, is projected to avoid a recession as well, although Germany’s economy may continue to lag. In China, a major stimulus package is set to boost GDP growth. And the combination of lower interest rates and falling energy prices is expected to shield most developing countries from economic and financial dislocations.

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© Project Syndicate

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