Central banks have initiated stringent monetary policy to curb inflation. Concerns regarding the financial system, spanning from bond markets to commercial property to the stability of the banks, are persistent. Approximately 4 billion individuals are set to participate in the elections this year, potentially leading to unforeseeable outcomes. Most notably, conflicts ranging from Ukraine to Israel to the Red Sea have engulfed the world in turmoil. With other unresolved tensions, particularly in Taiwan, seemingly looming on the horizon, analysts are increasingly referring to the current state as a “polycrisis,” “hellscapes,” and a “new world disorder.”
However, surprisingly, the global economy seems to be defying these apprehensions for now. At the outset of 2023, almost all economists anticipated an impending global recession. Nevertheless, global GDP expanded by approximately 3%. Early indications suggest that this momentum is being sustained this year. Data from Goldman Sachs, a financial institution, indicates that global economic activity is almost as vibrant as it was in 2019. A gauge of weekly GDP compiled by the OECD, a consortium primarily comprising affluent nations, reveals similar findings. Additionally, a measure of global activity derived from surveys of purchasing managers (referred to as PMI data) indicates robust growth across the globe.
Labour markets are even more robust. Unemployment rates across the OECD persist comfortably below 5%. The proportion of working-age individuals gainfully employed, a more accurate gauge of labor market vigor, has reached an all-time high. Healthy job markets are bolstering household finances, which had been impacted by inflation. Real household disposable incomes within the G7 declined by 4% in 2022, but are now on the rise again.
Undeniably, some countries are faring less favorably. Chinese economic growth figures continue to underwhelm. Some of those emerging from Europe are disquieting. Germany, grappling with the repercussions of soaring energy prices and competition in its renowned automobile industry from Chinese electric vehicle exports, might be heading into recession. However, there are also signs of resilience. In January, total nonfarm payroll employment in the U.S. surged by 353,000—a remarkable figure, surpassing nearly all expectations.
As of now, there appears to be scant evidence indicating that the issues in the Red Sea are undermining the economy. PMI data suggest that manufacturers are contending with prolonged delivery times. This aligns with vessels rerouting around the Cape of Good Hope, elongating the journey between Shanghai and Rotterdam from 11,000 to 14,000 miles. Nevertheless, shipping costs represent a small fraction of the overall price of goods in nearly all economies. Consequently, even the most pessimistic pundits forecast a marginal increase in inflation due to the Red Sea disruption, amounting to no more than a negligible deviation.
What explains the seeming indifference of the global economy to the new world disorder? Markedly higher interest rates have succeeded in reducing inflation from over 10% across affluent nations to approximately 6%. This not only enhances the purchasing power of households but also uplifts their morale. Indeed, following a historic low in 2022, consumer confidence in the prosperous world has soared. Elevated borrowing costs have been tempered by the fact that a substantial amount of household and corporate debt is on fixed interest rates.
There is also a compelling hypothesis: after enduring numerous seismic global events, the world might be less averse to chaos than it once was. This aligns with scholarly research, including a recent study by two scholars at the Federal Reserve, which suggests that the impact on output from a surge in economic uncertainty diminishes after a few months.
All astute economists remain watchful. Higher interest rates could potentially yield delayed effects on growth. An escalation in the Russia-Ukraine conflict or the situation in the Red Sea could instigate another round of disruptions to energy supply, contributing to inflation. All projections could be overturned if Xi Jinping decides to make a move on Taiwan. Yet conversely, declining inflation and the prospect of enhanced productivity from inventive AI might prompt an acceleration in GDP . Moreover, the global economy has already demonstrated its resilience. Polycrisis, what polycrisis? ■