The past year has been challenging for the global economy. Inflation was too high and growth too low. Growth in China was also weak amid multiple COVID-19 waves. However, after a challenging 2022, we expect China’s growth to rebound strongly and contribute a quarter to global growth. China’s recovery is welcome given slowing global growth. The developments, prospects and political challenges for the world and China are explained in more detail below.
The global economy has not yet fully recovered from the pandemic. Last year, global GDP was around 3.5 percent below our pre-pandemic forecast. Instead of catching up on lost ground, the global economy has continued to fall back in 2022. We estimate global growth at just 3.4 percent, below the historical average (2000-2019) of 3.8 percent. Two key factors are rising inflation and the slowdown in China.
First, rising inflation. Global inflation hit 8.8 percent last year. In response, central banks around the world tightened monetary policy to curb inflation. This is the right policy and it works. Therefore, we forecast a steady decline in inflation to 4.3 percent in 2024.
However, tighter monetary policy works by slowing the economy. This is one of the reasons why we expect global growth to be even worse this year than last year. Specifically, falling to 2.9 percent in 2023 before rising slightly to 3.1 percent in 2024. But historical experience is clear: price stability is a prerequisite for sustainable growth. More importantly, it’s ultimately less costly to bring inflation down sooner rather than later.
China’s growth story is different. Over the past year, growth in China has slowed as a result of the triple headwinds from COVID-19, struggles in the real estate sector and slowing external demand. At 3.0 percent, growth in 2022 exceeded market expectations.
Contrary to the global outlook, we expect a significant recovery in China this year. We forecast growth to 5.2 percent, despite slower external demand and ongoing challenges in the real estate sector. The key development is the faster than expected change in COVID-19 policy and the fading of COVID-19 waves fueling a resumption of economic activity. Uncertainty about the outlook is higher than usual. The main risks relate to COVID-19 and real estate. For real estate, the challenge is to keep the housing market in balance while preventing disorderly adjustment. The latter would require dealing with issues related to financial stress among some developers and the stock of sold but unfinished homes.
We have also updated our medium-term forecasts for China. We recently published our annual report on China, which covers recent developments, the outlook and politics in detail. In it, we revised our medium-term growth forecast for China downwards to just under 4.0 percent. This reflects our view of slowing productivity growth amid insufficient growth-enhancing structural reforms.
The good news is that with comprehensive reforms, higher growth potential is achievable for China. These reforms include measures to increase productivity, particularly through market-enhancing reforms that encourage private sector development, raising the retirement age to increase labor supply, and eliminating local protectionism.
Measured against the US dollar, China is the second largest economy in the world. With the Purchasing Power Parity (PPP) weights we use to aggregate global GDP, it is already the largest economy in the world. With the global economy still struggling to recover from the pandemic, robust growth in China would provide a needed and welcome boost to global growth over the medium term.
Another necessary and welcome boost would come from increased international cooperation. The global economy faces a much greater risk of fragmentation, which could undo decades of gains in economic integration. This risk must be avoided and replaced with a renewed spirit of international cooperation. In the economic area, trade, debt and climate protection are three focal points of cooperation.
Until recently, trade was an important engine of growth. It can happen again with efforts to scale back distorting subsidies and trade restrictions that have been imposed in recent years; Strengthening of the World Trade Organization (WTO), including new market access agreements; and, where helpful, conclude plurilateral agreements between subgroups of WTO members. In addition, countries should carefully weigh the costs of “national security” measures related to trade and investment at home and abroad.
When it comes to debt, vulnerable countries need help from the world community. About 60 percent of low-income countries are in or near a debt crisis. Another 25 percent of emerging markets are exposed to high risk and face default-like credit spreads. We have seen progress in this area, including an agreement on the G20 common framework for debt treatment. Making the process safer and faster would serve both creditors and debtors.
Last but not least, it is about climate protection. Joint action is essential to tackle the climate crisis. The COP27 agreement to establish a loss and damage fund for the most vulnerable countries shows progress can be made. More is needed to accelerate the green transition, including countries rapidly implementing accountable mitigation strategies, international coordination of carbon pricing or equivalent strategies, and global collaboration to build resilience.
Source: CGTN
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