How the world economy learned to love chaos
cbanks in embarked on a tight monetary policy to crush inflation. Concerns about the financial system, from bond markets to commercial real estate to the health of banks, are ever-present. About 4bn people will go to the polls this year, with unpredictable results. Even worse, the world is on fire, with conflict between Ukraine and Israel to the Red Sea. Other wars, especially in Taiwan, do not feel far away. It is little wonder that analysts speak of “polycrisis”, “hellscapes” and “a new global disorder”.
And yet, for now at least, the global economy is laughing in the face of these fears. At the beginning of 2023, almost all economists believed that there was a recession in the world that year. Instead, global GDP has grown by about 3%. Early indications are that progress is continuing at the same rate this year. Data from Goldman Sachs, a bank, shows that global economic activity is about as vibrant as it was in 2019. GDP made by the OECD, a club of mostly rich countries, gets similar results. A measure of global activity derived from surveys of purchasing managers (so-called PMI data) indicating strong growth worldwide.
Labor markets are even stronger. The unemployment rate is across the OECD still well below 5%. The proportion of working-age people in work, a better measure of labor market strength, is at an all-time high. Healthy job markets boost family finances, which are hit by inflation. Real household disposable income across the G7 moved 4% in 2022, but are now growing again.
True, some countries are not doing so well. China’s growth figures remain disappointing. Some of those coming out of Europe are concerned. Germany, facing high energy prices and competition in its famous car industry from Chinese electric car exporters, may be in decline. But there are stronger shows too. In January non-farm payroll employment in America rose by 353,000 – a blistering figure, exceeding almost all expectations. Although Britain was at the center of economists’ jokes as it teetered on the brink of recession last year, the last one is here. PMI data points to very strong growth.
So far there does not seem to be much evidence that problems in the Red Sea are derailing the economy. PMI data indicates that manufacturers are facing longer delivery times. This is consistent with ships moving around the Cape of Good Hope, which increases the length of a trip between Shanghai and Rotterdam to 14,000 miles, from 11,000. But in almost every economy shipping costs are a small fraction of the total price of goods. Even the most pessimistic gains pencil in a jump in inflation, due to the Red Sea conflict, which is no more than a circular error.
Why is the global economy so apathetic to the new world disorder? High interest rates have managed to bring inflation down from a peak of over 10% across the rich world to around 6%. This not only increases the purchasing power of households; it will lift up their spirits too. In fact, after hitting an all-time low in 2022, the confidence of the world’s wealthy consumers has risen sharply. Higher borrowing costs are mitigated by the fact that a lot of domestic and corporate debt is on fixed interest rates.
There is also a more interesting possibility: after so many shocking developments around the world, the world does not think about chaos as much as it once did. This is consistent with academic evidence, including a recent paper by two researchers at the Federal Reserve, which suggests that the rate is the result of a spike in economic uncertainty in the decline after a few months.
All good economists remain cautious. Higher interest rates may delay growth. An escalation in the war between Russia and Ukraine or the Red Sea could trigger another round of shocks to energy supplies, feeding into inflation. All bets are off if Xi Jinping decides to move on to Taiwan. But on the flip side, falling inflation and a potential increase in productivity from generations AI could be encouraged GDP to accelerate And the global economy has already shown its strength. Polycrisis, what polycrisis? ■