The world economy is in a period of “fragile resilience” where geopolitical headwinds could undermine its growth potential, according to a group of experts speaking at a conference running alongside the spring meetings of the IMF and World Bank today in Washington, DC. The forthcoming US election, poor productivity in many developed nations and ballooning debt could upset any bright spots.
A panel discussion during an Institute of International Finance conference today in Washington, DC, pointed out that many analysts and economists were surprised by the rapid rise in interest rates and the soft economic landing so far. This has led to what one panellist, Paul Gruenwald, global chief economist at S&P Global Ratings, called “fragile resilience”.
This resiliance has been partially supported by central bankers who have managed to strike a balance between slowing inflation and maintaining growth, the panel concluded. There have also been some trends that have helped policy makers ease inflation. For instance, the unwinding of world supply chains and de-globalisation have been overestimated.
Megan Greene, an external member of the monetary policy committee at the Bank of England, said: “Do we see the reshaping of trade lines? Yes the data shows it is absolutely happening.
“But it is not happening in a way economists thought when Covid broke out. We see slower globalisation but not de-globalisation. There is a focus on what you might call ‘supply chain plus’.
“So, import prices are slightly higher than two years ago at the margins.”
Much of the reshoring that economists see is being driven by national security concerns, especially in the US, said Gruenwald.
“There is a large geopolitical aspect to what is happening in the US, as a large percentage of private sector activity has been closely aligned to President Joe Biden’s industrial strategy.
“So think of tax cuts linked to the Inflation Reduction Act and the Chips Act. I do worry, as after World War One the world carved itself into rival trade blocks. Trade then suffered and did not recover until 1970. That is partly happening again,” he said.
There are also concerns that tension will hit areas of innovation that need co-operation, like artificial intelligence, where development will be fragmented.
Debora Revoltella, director of the economics department at the European Investment Bank, called such a potential development “dangerous”.
On the EU, Revoltella said that beefing up the single market and competitiveness is very high on the policy agenda.
She said her two main concerns in the medium term are how the US presidential election will shape its international role and how geopolitics will distract from the shift to net zero.
Jonathan Pingle, chief US economist at UBS, said the country’s deficit and debt positions could become more pronounced as time goes on.
“We are headed towards an extremely consequential presidential election in the US with rising government debt. This has a distributional impact for people on lower incomes and small to medium-sized corporations.
“It weighs on households and makes it difficult to fund domestic priorities. We see 6 per cent or $3tn US budget deficits as far as the eye can see.”
