Behind the news
10:00
The continent is suffering from an economic attack of Long Covid
from John Rapley
He needs a dollar. Photo credit: Getty
The global economy, which was supposed to come back to life after the pandemic, is showing signs of ongoing illness. The World Bank's latest report Global economic outlook paints a bleak picture of slowing growth, marking a “miserable milestone”: not just a global economy growing slower than before the pandemic, but also a global economy expected to grow at its slowest rate in three decades: 2.4 % this year, with hopefully a slight improvement in 2025. Worse, investment is expected to rise by 3.7% per year, barely half the average over the last decade, which could lead to slow growth.
While the crisis is being felt almost everywhere, global development is being put under considerable strain by the industrialized countries, with expected growth of just over 1%. Even that performance is flattered by the United States, which is estimated to have grown 2.5% last year and is expected to slow to 1.6% this year – although there is a big asterisk next to that performance because of the country's investment The recovery has been fueled by massive borrowing, which recently pushed the country's national debt past $34 trillion.
However, the real sick man in the global economy is currently Europe. With the exception of Eastern Europe, the continent barely grew last year and European production is now on the rise recession. According to the IMF six of the world's ten weakest economies were located there last year.
It appears to be a case of economic long Covid. Just as the pandemic exacerbated many existing morbidities, the economic measures taken to avert collapse may have exacerbated underlying economic problems.
During the pandemic, Western countries paid their citizens to stay home while their central banks flooded their economies with money. This was to prevent asset prices from crashing. But while this has prevented the deep scars that have left some of the less fortunate developing countries, it appears to have hindered recovery. As governments have increased their debt by an average of a quarter of GDP, they now lack the available funds to invest in fixing the problems that had left them festering before the pandemic, be it a lack of housing, a decaying German one Infrastructure or Britain's ailing healthcare system.
Meanwhile, asset inflation, from real estate to corporate bonds to cryptocurrencies, has diverted capital away from productive investments and into rental-seeking opportunities. Unless there is a significant decline in asset prices, this misallocation of capital is likely to continue to be a problem.
Even the US is not immune to these difficulties, as it is not clear whether its debt is sustainable, while the proliferation of zombie companies kept afloat by cheap credit is causing ongoing stress in the banking system. But with America still holding the world's reserve currency, the planet was willing to continue buying its bonds to finance its recovery.
In contrast, European countries lack the luxury of seemingly unlimited credit, as Britain discovered with Liz Truss's ill-fated 2022 mini-budget. Forced to engineer recoveries while balancing balance sheets, they find the global economy less friendly.
Comments are closed.