Global economy; Is there a way out?

In a recent report, the World Bank has warned that the world may be heading towards an economic recession due to the disturbances and financial crises witnessed in the global markets, particularly in the economies of emerging markets and the continuation of the central banks in raising the interest rates to reduce inflation.

The report indicated that the global economy has become fragile and can no longer withstand any new challenges, already suffering from severe slowdowns, especially in the United States, China and the Eurozone.

The International Monetary Fund (IMF) report for the year 2023 also pointed out that the global economic situation is fraught with risks, with uncertainty prevailing worldwide due to rising interest rates, inflation rates, as well as political disputes.

The report added that the global economy is suffering losses due to the failure to address many issues, witnessing significant impact from global events starting from the COVID-19 pandemic in 2020 and its humanitarian, health and economic disasters, to Ukraine war in 2022 and its consequences on global food security, energy supplies and the unprecedented rise in global inflation rates, as well as the rise in interest rates and their negative effects on slowing down economic recovery, and finally, the Gaza war in 2023 and the events in the Red Sea and their impact on global trade, energy markets, and the subsequent economic effects locally, regionally, and internationally.

The global economy has faced numerous challenges, leading some countries to take measures to support their economies, such as adopting assistance and aid programmes, implementing financial incentive programmes to stimulate the economy, i.e. tax cuts, loan financing, supporting vital sectors, financing companies, boosting trade, encouraging international investment and reducing tariffs.

The global economy has entered 2024 with uncertainty, in addition to the increasing tension between the world's two largest economies -China and the United States. The internal difficulties facing both economies, such as local debt crises, rising interest rates and inflation, impacted their role in achieving global economic recovery.

In general, the global economy is currently suffering amidst financial sector chaos, international trade stagnation and investment decline. The investment climate has been affected by the crises that have resulted in economic growth slowdown, financial and banking system failures, with increasing global unemployment rate reaching 5.3 per cent, according to the International Labour Organisation.

Additionally, countries are facing a trade imbalance, with a trade drop reaching 18.7 per cent ($774 billion), which may lead to deterioration of local currencies and instability in financial markets. 

The global economy is also experiencing widespread slowdown with uncertainty and ambiguity about future trends, leading to increased poverty rates and social problems.

The World Bank reports indicated global growth slowdown from 6 per cent to 2.9 per cent in 2023. Many countries have been affected by the international economic recession, with global economic growth rates declining from 3.4 per cent to 2.8 per cent due to continued interest rate hikes, reaching record levels of 5.5 per cent by late 2023.

Global trade activities have also faced significant challenges, with inflation rates continuing to rise to 9.1 per cent in US market in 2022, however it declined to 4.5 per cent by end of 2023. Supply and demand dynamics, global supply chains, have also been affected, with increased shipping and logistical costs in a turbulent scene that does not give promise for international trade.

On a related note, public debt levels have increased for many countries, with the global debt-to-GDP ratio rising to 337 per cent due to slowed growth and increased prices. The report provides that global debt has exceeds $307 trillion, while global GDP reached $103 trillion, posing significant challenges for countries in managing their debts and securing sustainable borrowing in the future.

This in turn forced credit rating agencies to review countries' abilities to repay their debts and achieve healthy growth rates. The continued state of uncertainty has negatively impacted global economic growth since 2020, affecting foreign investment. As per IMF Managing Director Kristalina Georgieva, foreign investment is now divided according to geopolitical lines not for economic causes. 

This division has led to growth slowdowns between non-aligned blocs and a decline in global trade activities within economic blocs from 2.2 per cent to 1.7 per cent, and trade volume reduction from 3 per cent to 1.9 per cent, harming many economies. However, IMF predicts global trade growth of 3.5 per cent in 2024, with advanced economies' imports rising by 3 per cent and emerging economies by 4.4 per cent.

On the other hand, it is noted that the global economy relies on the US interest rate pricing policy, as the interest rate index in US market drives global financial markets and monetary policy-making. This leads to problems related to public debts, increased financing costs, and budget deficits, especially in economies pegged to the US dollar. The increased debt will exaggerate the economic crises and will contribute to the slowdown of economic growth to 2.4 per cent in 2024.

Nonetheless, there exist available solutions to reverse the decline and rescue the global economy. Such solutions depend on the nature of the challenges, that includes enhancing free trade and globalisation, financial stimulus to achieve monetary stability, improving financial transparency, enhancing economic governance, accountability, fighting corruption, activating monitoring systems, and valuing workers' rights.

In addition, investing in infrastructure and improving education and training to meet labour market needs, enhancing innovation and entrepreneurship, supporting small and medium-sized enterprises to create new jobs, and adopting digital and technological transformation are essential solutions to rescue the economy. Furthermore, adopting flexible monetary policies to promote economic growth, such as reducing interest rates, easing monetary policy, asset purchases, and providing financing to banks and companies, is an important driver of the economy.

Finally, international coordination in addressing the challenges is necessary to improve global economy. For example, resolving the war in Ukraine which has cost the world hundreds of billions, allocating aid from major countries to low-income countries in the form of grants and assistance, and the IMF and major countries waiving the repayment of loans to countries with reform programs to support them in economic reform efforts are all realistic solutions to rescue the global economy.

Haider Majali is an economic and investment expert. haider.majali@gmail.com