Chief economists explore geoeconomic complexities and new drivers of growth: ‘Several opportunities exist’

Economic growth worldwide may have stumbled in recent years, but the outlook for the global economy is improving.

The latest World Economic Forum Chief Economists Outlook found that just 17% of chief economists surveyed expect the global economy to weaken in the remainder of 2024. The figure marks a staggering drop of the 56% of respondents who held the same view when the survey was last conducted in January. Moreover, more than eight in ten respondents now say they expect the global economy to strengthen or remain unchanged this year.

“The developing economic mood is one of cautious optimism,” the report states. “Signs of recovery in the manufacturing sector, coupled with improvements in business and household confidence, have bolstered the view that the sharpest risks to the near-term outlook have begun to stabilize.”

However, despite the brightening economic outlook, sources of heightened volatility remain throughout the global economy — many of which could have profound impacts on growth trajectories.

The Chief Economists Outlook adds that the improved expectations “take place against a backdrop of continuing high levels of uncertainty, not least because of global economic and geopolitical divergences and rifts.” Moreover, the expectations of growth vary significantly by region, with strong outlook for growth in most of Asia and the United States in 2024 and weak expectations for Europe.

So, amid the mixed outlook, how have heightened geopolitical complexities impacted the global economy and what developments will drive growth in the near future?

In the following statements, four chief economists provide insights.

“Economic growth has certainly become harder to crank up than it used to be. Across the world, nearly all of the forces that fueled prosperity after 1990 seem to have petered out. Working-age populations are shrinking nearly everywhere—except in the poorest countries. Trade and investment are pale shadows of what they once were. As a result, our research indicates that average global potential GDP growth over the remainder of this decade will decline by roughly a third from the rate that prevailed in the first decade of this century—to 2.2% a year.

“Yet several opportunities exist to boost growth. AI certainly holds great promise, but its potential—at least in the near term—will be confined to advanced economies, which have the digital infrastructure, the highly skilled workforces, and the institutional frameworks needed to make the most of the technology.

“For developing economies, however, the biggest opportunity might be in making it easier for women to join the workforce: closing the gender gap would essentially double the global growth rate over the next decade. All countries, moreover, can help themselves by resisting the temptations of economic nationalism: the world has benefited enormously from greater global trade and investment, we should all work to reinforce the international architecture that makes it possible.”

“I believe that the near future's world economic growth will be driven by developments such as strategic investments in infrastructure and the transition to clean energy. While policies focused solely on stimulating consumption can have short-term effects on growth, they may also contribute to inflationary pressures as a side effect.

“To boost economic growth effectively, it is preferable for public policies to concentrate on fostering investments in infrastructure that address deficits and promote the development of key industries. This approach can improve productivity, connectivity, and attract further investment, leading to economic activity and employment opportunities.

“The transition to clean energy presents a significant opportunity for growth, as it requires substantial investments in technology upgrades and the development of new industries. However, it is crucial to identify the specific potential of each economy and tailor policies accordingly, rather than adopting a one-size-fits-all approach from other contexts.

“In summary, a combination of strategic investments in infrastructure, the transition to clean energy, and policies that foster innovation and digitalization can effectively drive economic growth in the near future. However, it is essential to customize these policies to the unique realities and potentials of each economy to maximize their effectiveness.”

“The war in Ukraine continues to cast a long shadow over Europe. Despite a recent drop, the price of natural gas in Europe is still four times as high as in the US, eroding the continent’s competitiveness. And the weakness of the German economy translates into lower demand for exports from emerging Europe. Higher interest rates in advanced economies are keeping the cost of borrowing high, and eastern members of the European Union continue facing a significant risk premium, which went up as the war in Ukraine started.

“Central Asia is doing well, even though growth will moderate relative to last year as intermediated trade with Russia appears to have reached a plateau. But the influx of money, businesses and high-quality human capital from Russia that took place in 2022 is still paying dividends. Strong demand for key export commodities is helping as well.

“Southern and eastern Mediterranean will see acceleration of growth, though the region is affected by the fallout from the war in Gaza. While the impact of the war on government yields in Egypt and Jordan proved short-lived, the negative effect on tourist arrivals in Jordan and Lebanon may prove more lasting.”

“The geopolitical context is changing rapidly, and its full implications for global competition, production and value chains are yet to be fully understood. We’re seeing the emergence of trade disruptions, calls for strategic autonomy, proliferation of subsidies and rising tariffs, as well as new paths for the triangulation of trade flows. Terms like deglobalisation, slow-balisation or regionalisation are being used by economists to describe the evolving nature of global trade. At the same time, firms are navigating through this uncertainty, trying to assess whether shocks are temporary or persistent.

“European firms are particularly affected. What is clear is that Europe is more dependent on globalisation than the US. In some key sectors, Europe relies (relatively) more heavily on foreign sources of value added in its export products and has a higher share of its production targeting exports. This might explain why facing the first trade shocks, in 2022, most EU firms responded by stockpiling and increasing inventories and by diversifying suppliers. Only a small share of firms responded by retrenching. The EIB Investment Survey on firms, surveying 12,500 firms on an annual basis in the EU and in the US, shows that European firms fear disruptions in terms of trade, albeit slightly less than US firms. The survey shows that firms’ reaction to trade shocks is commensurate to their perception of these shocks, but even firms not directly involved in international trade are impacted and react.

“Moreover, the best firms – those innovating, advancing in the green transition or with better management – are also more ready to react. Temporary shocks are easier to navigate. With strong dependencies, if disruptions turn out to be more permanent, adjustment might be harsher and effects long-lasting. This calls from deep understanding of where strategic dependencies are and a reflection on how to build long lasting resilience.”