Record levels of government debt, geopolitical tensions that threaten to splinter the global trading system, and likely persistently weak productivity growth could open the world to a future of slow growth, holding some countries back before development even begins.
This sobering view on the post-pandemic global economy comes from research organized by the Kansas City Fed and debated here last weekend. It explores issues such as the prospects for technological innovation, public debt and the state of international trade at a time when Russia’s invasion of Ukraine and conflict between the United States and China erodes, at least in theory, what was once a broad global agreement to promote the free flow of goods and services.
“Countries are now in a much more fragile environment. They have used a lot of fiscal resources to deal with the pandemic… Then there are policy drivers, geoeconomic fragmentation, trade tensions, decoupling between the West and China, IMF Chief Economist Pierre-Olivier Gurinchas said in an interview on the sidelines of the Fed’s annual meeting. immigration pressure. “
Gurinchas said that the global economic growth may stabilize at about 3% per year, which is far lower than the growth rate of more than 4% when China’s rapid economic development drives global output to rise. Some economists believe that in a fast In a growing world, this growth is close to recession. It is still achievable in big countries and underdeveloped countries.
But in the emerging pandemic economy, “the global growth environment has become very challenging,” said Maurice Obstfeld, a former chief economist at the International Monetary Fund and now a fellow at the Peterson Institute for International Economics in Washington.
China is now facing long-term economic problems and a declining population. Emerging industrial policies in the United States and elsewhere are reordering global production chains in ways that are more permanent or serve national security purposes, but are also less effective.
The symposium was one of the first major attempts to assess long-term economic developments in the wake of the pandemic and amid renewed geopolitical tensions, after years of officials focusing initially on fighting COVID-19 itself before having to focus on the global outbreak outbreak. inflation.
There seems to be a broad consensus among economists and policymakers here that both trends before the pandemic weighed on global growth, but have been exacerbated by the health crisis and other recent events.
Public debt, which has risen from 40% to 60% of world economic output due to pandemic spending after surging during the global financial crisis 15 years ago, may now be at politically unviable levels, Serkan said. IMF economist Arslanalp and UC Berkeley economics professor Barry Eichengreen wrote in the paper.
The impact of “persisting” public debt varies by country, with higher-debt but higher-income countries such as the United States likely to be able to weather the storm over time, while smaller countries may face future debt, they said crisis or binding fiscal constraints. limit.
Globally, the consequences could be severe if public borrowing diverts capital away from countries with still-growing populations and less developed economies, said Eswar Prasad, a professor of economics at Cornell University.
“It puts us in a bleak place when you think about parts of the world that are labor-rich but capital-poor,” he said. While populations in major European countries, Japan, China and the United States are all aging, some African countries such as Nigeria The population is still growing rapidly.
“A More Naive Era”
Another pre-pandemic trend that has persisted and intensified has been increasing openness to policy, from outright protectionist tariffs imposed by former U.S. President Donald Trump to the Biden administration’s shifting production of products such as computer chips to Bootstrap Back to the U.S. Efforts
Jared Bernstein, chairman of the White House Council of Economic Advisers, said at the seminar that the industrial policy of the Biden administration will not necessarily support or oppose more international trade, because many intermediate products needed to make silicon chips need to be imported.
“In my view, despite a lot of rhetoric, the strategy we’re pursuing doesn’t mean more or less trade,” Bernstein said during a discussion.
Others point out that Russia’s invasion of Ukraine, and the subsequent rapid separation of European power grids from Russian energy, has broken one of the key tenets behind the spread of globalization: that trade creates lasting partnerships, if not outright allies.
Ben Broadbent, deputy governor of the Bank of England, said: “I do remember a time, perhaps a more naive time … more trade could create friends.”
But WTO Director-General Ngozi Okonjo-Iweala said that while the outbreak raised legitimate questions about the resilience of global supply, especially for sensitive products such as pharmaceuticals, moves to realign global production patterns could lead to opportunities for growth is on hold.
“From a political standpoint, you can understand how attractive it is to say we see these vulnerabilities, so we’re going to try to do business with people who share our values,” she said. But whatever the strategy—”nearshoring,” “AIA,” “reshoring”—she argues that “maybe you need to go a little further…if you’re going to diversify anyway…spread it To those who have been “on the fringes of the global system. “
“Friends” can change, she said, a pointed statement at a time when Trump, who has imposed tariffs on Europe, is re-election and recently floated the idea of sweeping import taxes.
If there’s one underlying bright spot, it’s the discussion surrounding advances in artificial intelligence as a possible driver of increased productivity.
Even so, however, we have to weigh the damage the technology can do against the findings of research showing that innovation is exponentially more difficult.
Even beyond that, any benefits are likely to come slowly.
“I think ChatGPT is like Peloton,” said Nela Richardson, chief economist at payroll processor ADP, comparing the AI innovator to the maker of premium exercise bike systems. “You can put any number of things in a home office. But that doesn’t mean people will use it.”