‘No shortages of headwinds’: Chief economists detail the hurdles facing the global economy

The global economy persists today amid protracted weaknesses as geopolitical rifts and tight financial conditions continue to subdue economic prospects worldwide.

The World Economic Forum’s January 2024 Chief Economists Outlook — released during the Forum’s Annual Meeting 2024 in Davos, Switzerland — highlights the precarious nature of the current economic environment. “Businesses and policy-makers face persistent headwinds and continued volatility as global economic activity remains slow,” the report notes.

In fact, more than half of chief economists (56%) surveyed in the report said they expect the global economy will weaken this year, while 43% foresee unchanged or stronger conditions. Moreover, although the expectations for high inflation have been pared back across all regions, the survey found that regional growth outlooks vary widely, with no region expected to see very strong growth in 2024.

So, amid the uncertainty, what kind of economic headwinds should businesses and governments expect to face this year and how might geoeconomic fragmentation impact economic activities?

In the following statements, eight chief economists provide insights.

“The World Bank’s latest Global Economic Prospects report predicts that global growth will slow to 2.4% in 2024 before edging up to 2.7% in 2025. That seems like a 'soft landing'—and it’s certainly cause for relief.

“Yet we see at least four things could upset the apple cart in 2024. Conflict is the first. We now have wars in two areas critical for food and energy—Ukraine and the Middle East. An escalation could hurt the fight against inflation and damage growth prospects. China’s sudden economic slowdown is the second major headwind. Chinese growth this year could be the slowest since 1990, outside of the COVID-19 era. That could hurt countries that depend on trade with China—especially those in global value chains. Financial stress is the third. It’s remarkable that the biggest surge in global interest rates in 40 years so far hasn’t caused the havoc we saw in the 1980s. Interest rates are coming down—but it might not be fast enough not for some countries. Trade fragmentation is the fourth. Trade restrictions and 'friendshoring' and 'nearshoring' might seem like logical policy responses to national-security concerns, but such measures could postpone the rebound we need to see in global trade.”

“The outlook for 2024 — be it rates, growth or technology — will be determined in no small part by the labour market. For example, on rates, labour market resilience is a key barometer for monetary policy. If labour markets continue to gradually cool with minimal increases in the unemployment rate, it may mark a rare successful soft landing by central bankers. But should the labour market abruptly weaken, with unemployment rates lurching higher, it will mean the soft landing was illusory and bring a rapid aboutface in the path of rates.

“The labour market will also be important for determining economic growth. With less room for additional fiscal policy, achieving economic growth at, or above, trend, will be increasingly reliant on consumers spending and confidence. That in turn, will depend on their access to income and employment. We see a labour market that is slowing albeit gradually with more slack and competition among job seekers for fewer roles.”

“The economic narrative has been dominated by inflation pressures, policy tightening, geopolitical stress, banking sector concerns and recession fears. Yet, the global economy ended 2023 on a positive note and outperformed on many metrics. Underlying this resilience are the many transformative forces that are evolving and impacting every economic sector, industry and society in ways not seen for decades. This sets a more hopeful stage for 2024, further bolstered by prospects of disinflation and central banks likely to end the hiking cycle.

“At the same time, there are no shortages of headwinds as the greater macro and market volatility that has dominated the post-pandemic period is set to continue. Foremost will be the interplay of geopolitical uncertainties as well as a record number of upcoming elections across the world, which will add to the layers of risk and unpredictability.

“The rise in strategic geopolitical rivalries in recent years has also fuelled scepticism towards the economic gains from global integration. Although dissatisfaction with the concept of globalization has turned into a potent force, the strong recovery in cross-border trade, capital and people flows in the last few years is indicative that much of global integration is not easily reversible.

“The multiplying fault lines of geoeconomic fragmentation must mutate the current state of globalization towards a more comprehensive concept that takes national and regional interests into consideration; addresses the domestic challenges confronting both the developed and developing countries; and promotes diversification of trade and investment across countries and regions.”

“Geopolitical tensions have put the world on a path to economic fragmentation. This is potentially a very risky and costly path, not only in terms of its impact on economic growth but also because it may jeopardize the fight against climate change.

“Addressing the climate emergency will require a large increase in the supply of minerals and metals, whose production tends to be heavily concentrated in a handful of countries. Yet the on-going proliferation of measures aimed at restricting technology flows to strategic competitors is often met with retaliation in the form of export restrictions on minerals and metals required by high technology, renewable energy and electric vehicles industries. In 2022, around 30% of global exports of critical products (by value) were subject to export restrictions, up from just 5% in 2019. Developing new supply sources is possible, though setting up new mines and refining facilities takes years and requires large investment, while an export restriction can be introduced at the stroke of a pen.

“The alternative is a renewed push for multilateral cooperation, reducing trade conflicts and countering fragmentation in the supply of critical raw materials in order to preserve planetary health and humanity’s future.”

“In my assessment, tight monetary policy, limited fiscal space and rising geopolitical tensions are the main economic headwinds businesses and policymakers face in 2024. Despite these headwinds, the global economy continues to show remarkable resilience with a soft landing now firmly in sight.

“However, we already see first signs of geoeconomic fragmentation, with global trade increasingly reorienting around geopolitical lines. This is not only economically costly but also makes it harder to build a more secure, inclusive, and sustainable world – as we show in our World Trade Report 2023.”

“As the world economy enters 2024, global growth is slowing, but recent progress on disinflation has been better than expected. This raises the prospects for policy rate reductions, making a ‘soft’ economic landing more likely. Regardless of how early and rapid these policy rate cuts may be, however, interest rates will remain much higher than in most of the post-[global financial crisis] period. Thus, businesses and governments, whose debt levels have surged in recent years, will face higher debt servicing burdens and funding costs from now on.

“Companies are also forced to re-think their global value chains in light of rising geopolitical fragmentation, especially with China, while also having to implement de-carbonisation strategies. In their decisions, competing government subsidy programs play an increasing role. In advanced economies, ageing populations make labour more scarce. Over time, these challenges could boost growth through the innovations and investments they require, but their immediate consequences are higher costs and reduced efficiencies.”

“With significant global challenges greeting the new year, 2024 will serve as a bridge between the post-pandemic economic recovery and a new growth path, one shaped both by old trends long in the making and rapid-fire new developments that society has yet to harness.

“The bulk of the pandemic’s economic pain is behind us, but the crisis and its aftermath continue to hinder growth. In the near term, large and unchecked fiscal deficits, uncomfortably high inflation, elevated interest rates and a reorientation of global supply chains are pushing up costs and working in concert to slow global economic progress. Then there are the demographic trends that have been building for decades and could soon reach a tipping point in parts of the world. The world’s aging population will weigh heavily on the labour market. In some countries, an older workforce could hamper efforts to regain and maintain pre-pandemic levels of growth. Europe, China and the US are particularly vulnerable. Widespread retirements will mean skill shortages and the loss of institutional knowledge.

“In other parts of the world, the rapid growth of young populations, especially in emerging and developing economies, will pose its own challenges. These nations will need to ensure that jobs are available to meet this emerging workforce.”

“In a standard scenario, 2024 will be a year of a soft landing for the global economy, as monetary easing in the US and Europe provides a benign environment. A standard scenario, however, often turns out to be simply wrong, as was inflation forecasts last year. So let us consider risk scenarios.

“First, the timing and magnitude of monetary easing is still uncertain. Expanding government spending and costs arising from renewal of global supply chains may lead to stubborn inflation, which could delay the beginning of easing. We should never underestimate central banks’ instinctive and institutional desire to restore 2% price stability.

“Second, we may not find a clear driving force for growth. The US economy last year showed fairly good performance, but it was largely assisted by the normalization of economic activity. This mechanism will no longer work this year. In addition, China, like Japan in the past, suffers from many economic diseases including real estate slumps and a rapidly aging population.”