Central banks have introduced strict monetary policies to curb inflation. Concerns about the financial system, from bond markets to commercial real estate to the health of banks, are pervasive. This year around 4 billion people will go to the polls, with unpredictable consequences. Most worryingly, the world is on fire, with conflict from Ukraine to Israel to the Red Sea. Other wars, not least in Taiwan, do not seem to be far away. No wonder analysts are talking about “polycrisis,” “hellscapes,” and “New World disorder.”
And yet, at least for now, the global economy is laughing in the face of these fears. At the beginning of 2023, almost all economists assumed that a global recession would be imminent this year. Instead, global GDP grew by about 3%. Early indications suggest that progress will continue at the same pace this year. Data from the bank Goldman Sachs suggests that global economic activity is about as buoyant as it was in 2019. A measure of weekly GDP compiled by the OECD, a club of mostly rich countries, finds similar results. A measure of global activity (called PMI data) derived from surveys of purchasing managers suggests strong growth worldwide.
Labor markets are even stronger. The unemployment rate across the OECD remains well below 5%. The share of working-age people who actually have jobs – a better measure of the strength of the labor market – is at an all-time high. Healthy labor markets strengthen family finances affected by inflation. The real disposable income of households in the G7 countries shrank by 4% in 2022, but is now growing again.
Of course, some countries are doing less well. Chinese growth figures continue to disappoint. Some of those coming from Europe are worrying. Germany could be in recession as it faces the fallout from high energy prices and competition in its famed auto industry from Chinese exports of electric vehicles. But there are also stronger performances. In January, the total number of nonfarm payrolls in America rose by 353,000, a staggering number that exceeded almost all expectations.
So far there doesn't appear to be much evidence that problems in the Red Sea are derailing the economy. PMI data suggests manufacturers are facing longer delivery times. This is consistent with the rerouting of ships around the Cape of Good Hope, increasing the length of a voyage between Shanghai and Rotterdam from 11,000 to 14,000 miles. But in almost all economies, shipping costs are only a tiny fraction of the total price of a product. Even the most pessimistic cranks are expecting a rise in inflation due to the Red Sea disruption, amounting to little more than a rounding error.
Why is the global economy so oblivious to the new world disruption? High interest rates have managed to bring inflation down from a high of more than 10% in the rich world to around 6%. This not only increases the purchasing power of households; it also lifts their mood. In fact, consumer confidence in the rich world has risen sharply after hitting all-time lows in 2022. The higher borrowing costs have been tempered by the fact that many households and businesses have fixed-interest debt.
There is also an even more interesting possibility: after so many shocking global developments, the world is no longer bothered by chaos as much as it used to be. This is consistent with scientific evidence, including a recent paper by two Federal Reserve researchers, that suggests the impact of a surge in economic uncertainty on output fades after a few months.
All good economists remain vigilant. Higher interest rates could have a delayed impact on growth. An escalation in the war between Russia and Ukraine or in the Red Sea could lead to another shockwave in energy supplies and fuel inflation. If Xi Jinping decides to move against Taiwan, all bets are off. But on the other hand, falling inflation and a potential productivity boost from generative AI could lead to an acceleration in GDP. And the global economy has already demonstrated its resilience. Polycrisis, what polycrisis?
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