In the week of Halloween it’s tempting to observe how a number of economic risks — like the festival’s elusive ghouls and spectres — are casting a dark shadow over the global economic landscape.
Rather like stepping into a haunted house, the world’s economy is grappling with some hair-raising challenges. As it is, the globe is only gradually recuperating from the aftershocks of Covid, the war in Ukraine and the surging cost of living. Yet amid the upheaval in energy and food markets, and interest rates ratcheted up to tackle the highest inflation in decades, the global economy may have decelerated but it hasn’t ground to a halt.
This underscores a remarkable resilience, even if it’s true that growth is slow relative to its historic average.
And the good news from the latest projections from the International Monetary Fund (IMF), in its October World Economic Outlook, is that we may even see a soft landing for the global economy. That suggests countries may yet be able to tame inflation without inflicting immense damage on their growth prospects.
Peering into the crystal ball, these are the prominent downside economic risks haunting the world this season:
- Ghosts of inflation past: Labour markets operating at full steam, and wage demands aimed at offsetting cost of living pressures might add to lingering inflationary pressures. This risk is heightened by surplus household savings in some countries damping the impact of higher interest rates.
- A chilling escalation in the Israel-Palestine war: The ongoing conflict between Israel and Hamas has the potential to entangle neighbouring countries. That could add to inflationary pressures and even lead to a global economic recession.
- The dragon’s slumber: The extent of the economic slowdown in China largely hinges on how President Xi Jinping addresses the growing strain on local government finances. Persistent concerns about financial stability in China could spread across other emerging markets, causing exchange rates to blow out and disrupting capital flows.
- Spells of volatile commodity prices: In the absence of new interventions, an increasingly hostile future looms for agricultural commodities, which raises food security risks. Similarly, a decrease in oil supply or fragmentation in economic ties could trigger a surge in oil prices or disrupt global supply chains. And if that happens, growth may suffer, while inflation would rise rather than fall.
- Eerie whispers of a market repricing: Should inflation stresses be revived, countries may reconsider whether more interest rates are needed. Besides squeezing asset prices, it also would put extra pressure on companies and entities with delicate balance sheets.
- Debt demons loom: Borrowing costs for developing economies remain high. And the longer it remains that way, the greater the risk of reduced government spending and those countries’ vulnerability to debt distress.
- Fractured frontiers: The fragmentation of nations into blocs engaging in exclusive trade might hurt worldwide economic expansion. Already, escalating geo-economic tensions have the potential to impede collaborative efforts to address global socioeconomic challenges.
This underscores a remarkable resilience, even if it’s true that growth is slow relative to its historic average
While there’s clearly a downside bias to these global risks, there are also a few treats or potentially positive developments which could do wonders. These include:
- Tasty inflation: If companies can absorb cost increases and inflation begins to ease, the buying capacity of households could be restored, enabling central banks to expedite plans to drop interest rates.
- Resurrection of domestic demand: If labour markets remain resilient and a surplus of pandemic-induced savings is released, we could see global consumption rise.
- Productivity potion: A fresh productivity surge, partly propelled by artificial intelligence, could amplify investment and enhance growth prospects.
In the wake of the spookiest night of the year, it’s clear that the global economy has been navigating a haunted mansion thronging with risks.
Many countries are still grappling with persistently high inflation and soaring government debt — and the IMF says it’s vital to prioritise supply-boosting reforms to mitigate any damage.
So what measures would work? Well, first, monetary and fiscal policies should be harmonised to bolster the credibility of plans to counter inflation, while countries should be vigilant in monitoring financial strains, and show they’re ready to deploy tools to contain any stress. They’ll also need to enhance supervision of their markets, while mitigating debt distress. And they’ll need to implement reforms to remove the obstacles to growth in their economies.
It won’t be easy to co-ordinate, but if countries like South Africa can get it together to do all of this, it’d work a treat.
* Packirisamy is an economist with Momentum Investments
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