Don't count on a soft landing for the global economy

Kenneth Rogoff

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A month into 2024, the consensus forecast for the global economy remains cautiously optimistic, with most central banks and analysts projecting either a soft landing or potentially no landing at all. Even my colleague Nouriel Roubini, famous for his bearish tilt, regards the worst-case scenarios as the least likely to materialise.

The CEOs and policymakers I spoke to during last month’s World Economic Forum (WEF) in Davos echoed this sentiment. The fact that the global economy did not slip into recession in 2023, despite the sharp rise in interest rates, left many experts upbeat about the outlook for 2024. When asked to explain their optimism, they either cited the US economy’s better-than-expected performance or predicted that artificial intelligence would catalyse a much-hoped-for productivity surge.

The world’s economists appear to share this outlook. The WEF’s Chief Economists Outlook for January 2024 found that while a majority of respondents foresaw a mild global downturn in 2024, most were not overly concerned and viewed the expected slowdown as a healthy correction to the inflationary pressures caused by excessive demand.

Even the disruption to global trade caused by Yemeni Houthi attacks against commercial ships in the Red Sea and the ongoing wars in Ukraine and Gaza have not dampened the jubilant mood of analysts and business leaders. The US stock market is at record levels, and even the normally conservative International Monetary Fund revised its growth forecasts upward, with the latest World Economic Outlook describing the risks to global growth as “broadly balanced.”

Despite the relatively buoyant consensus, recent developments suggest that the risks to global growth are still tilted to the downside. For starters, I am deeply sceptical of the Chinese government’s announcement that its economy grew by 5.2 per cent in 2023.

Gross domestic product (GDP) growth figures have long been a politically charged issue in China, particularly over the past year, as President Xi Jinping consolidated his one-man rule by sacking numerous top officials, including his defence and foreign ministers.

The combination of a prolonged economic slowdown and a collapsing real-estate sector could bring China to the brink of a Japan-style “lost decade.” The obvious Keynesian solution to the country’s slow-moving trainwreck of collapsing real-estate ventures and local government debt is to initiate direct cash transfers to households. But, given that Chinese consumers are more inclined to save, and that government debt is already rising rapidly, a debt-deflation spiral seems increasingly likely.

Meanwhile, despite dodging a recession in 2023, European economic growth is widely expected to remain lacklustre this year. Moreover, European countries’ persistent unwillingness to invest in their own defence suggests that former US President Donald Trump’s potential return to the White House in 2025 could necessitate a painful adjustment.

Europe is also grappling with the adverse economic effects of US President Joe Biden’s Inflation Reduction Act (IRA), which uses tax incentives to lure European companies. While the IRA is ostensibly aimed at accelerating America’s green-energy transition, it is essentially a protectionist trade policy. It may have provided the US economy with a short-term boost, but its long-term consequences could mirror those of the 1930 Smoot-Hawley Tariff Act, which triggered an international trade war and exacerbated the Great Depression.

Alarmingly, both Democrats and Republicans in the US seem uninterested in cutting government spending, let alone reducing the deficit. Regardless of which party controls Congress after November’s election, a deficit-fueled spending spree is all but certain. But if real interest rates remain elevated, as many expect, the government could be forced to choose between deeply unpopular fiscal tightening or pressuring the Federal Reserve to allow another bout of inflation.

Despite the widespread belief that the global economy is headed for a soft landing, recent trends offer little cause for optimism. As the world confronts yet another turbulent year, policymakers and analysts need to bear in mind that a soft landing means little if the runway is in an earthquake zone.