The post-COVID recovery has lost momentum and the global economy is faltering, with many countries already in or close to full-scale recession due to heightened uncertainty and rising risks. The October 2022 update of the Brookings-Financial Times TIGER Indices shows that growth momentum as well as financial market and confidence indicators have deteriorated significantly around the world in recent months.
A series of self-inflicted wounds ranging from China’s zero-COVID policy to the UK’s fiscal recklessness, piling on top of ongoing supply chain disruptions and the protracted war in Ukraine, have severely limited policy space. High and persistent inflation around the world and central bank actions to contain it are depressing economic activity, dampening household and business confidence and rattling financial markets.
Large advanced economies such as the Eurozone, Japan and the UK have been hit by a variety of adverse external shocks, often compounded by sluggish and tepid policy responses, throwing their growth trajectories off balance. Many developed markets are now facing a combination of sharp currency depreciations (relative to the US dollar), rising government bond yields, tight public finances and tightening policy restrictions that have long characterized periods of economic and financial stress in emerging markets.
Click on a country name under the composite index to view charts for the major TIGER indices by country.
The US economy is full of conflicting signals. Consumer demand remains strong and employment has continued to grow at a fairly healthy pace. At the same time, GDP growth is anemic while inflation remains elevated by any measure, leaving the Federal Reserve little choice but to continue raising interest rates despite tightening financial conditions due to the stronger dollar and falling financial asset values.
Energy disruptions are fueling inflation and hampering growth in European economies, with the prospect of winter energy shortages hurting private sector confidence. Emblematic of the strains on the UK economy, the fall in sterling reflects a combination of these unfavorable external circumstances, the lingering fallout from Brexit and undisciplined fiscal policy. Many European countries face additional concerns about populist policies that could increase risks to fiscal and financial stability.
Japan is the only major advanced economy that has the luxury of loose monetary policy while inflation remains contained. This could help sustain steady, albeit subdued, growth as the yen’s rapid depreciation has not had any significant negative impact so far.
Emerging market economies are facing similar challenges to their advanced-economy counterparts, including high inflation and depreciating currencies, but generally have better growth prospects. Still, weak global demand and tighter financing conditions will increase pressure on developing countries with current account deficits. However, with a few exceptions such as Turkey, Sri Lanka and Venezuela, where rampant economic mismanagement has led to currency collapses, emerging markets in general do not appear to be directly threatened by balance of payments crises.
China faces a host of problems stemming from the government’s rigid adherence to a zero-COVID strategy, a faltering real estate sector and boiling tensions in the financial system. Inflation remains under control, although the renminbi’s depreciation against the dollar is limiting the People’s Bank of China’s ability to cut interest rates. The government and the PBOC have introduced a range of fiscal and monetary stimulus measures, but these have had limited impact in boosting private consumption and investment. Meanwhile, export growth is likely to be dampened by weak global demand.
India’s economy remains a bright spot and should post strong growth this year and next. Various reforms implemented in recent years appear to be paying off, with even exports picking up as the rupee depreciates. However, curbing high inflation is proving to be a challenge for the central bank.
The Russian economy has been hit by economic and financial sanctions imposed after its invasion of Ukraine, although the ruble has appreciated on strong export earnings and weak imports. Latin American currencies have performed surprisingly well this year, but Brazil and many other countries in the region are facing a challenging political environment that could dampen domestic demand and growth, discourage foreign investment and fuel economic instability.
Governments and central banks can no longer afford the luxury of unfettered fiscal and monetary stimulus to stabilize growth and absorb adverse shocks. At the very least, governments must avoid unhelpful populist measures (particularly poorly targeted fiscal measures), do whatever they can to overcome supply constraints, and help central banks bring inflation under control. Finally, increases in food and energy prices have particularly adverse effects on poor countries and poorer households in all economies.
Given the limited room for maneuver, monetary, fiscal and other economic policies need to act together to mitigate near-term inflationary pressures and focus on policies that can improve long-term growth. For example, in addition to stimulating investment in green technologies and various forms of infrastructure, it could help to ease constraints on labor supply and trade. Such measures, in turn, are essential to support both private sector demand and confidence in the near term, while helping to re-anchor inflation expectations.
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