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Opinion: Brace for a turbulent U.S. and global economy

  • The consensus forecast for the global economy remains cautiously optimistic
  • CEOs and policymakers express optimism at the World Economic Forum
  • Despite the positive outlook, risks to global growth still exist
  • China’s economic woes and European economic growth concerns
  • Potential consequences of U.S. trade protectionism and deficit spending

Introduction

Several weeks 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. This positive outlook was echoed by CEOs and policymakers at the World Economic Forum in Davos. However, recent developments suggest that risks to global growth are still present and must be considered.

Optimism at the World Economic Forum

During last month’s World Economic Forum, CEOs and policymakers expressed optimism about the global economy. The fact that the global economy did not slip into recession in 2023, despite a sharp rise in interest rates, left many experts upbeat about the outlook for 2024. Reasons for this optimism included the better-than-expected performance of the U.S. economy and the potential catalyzation of a productivity surge through artificial intelligence.

Risks to Global Growth

Despite the positive outlook, there are still risks to global growth that need to be considered. The Chinese government’s announcement of a 5.2% economic growth in 2023 is met with skepticism, as GDP growth figures in China have been politically charged. The Chinese economy is grappling with deflation, falling property prices, and weak demand, which could potentially lead to a Japan-style “lost decade” if not addressed properly.

European economic growth is also expected to remain lackluster this year. Additionally, European countries’ unwillingness to invest in their own defense could pose challenges if former U.S. President Donald Trump returns to the White House. The ongoing war in Ukraine depletes ammunition stockpiles, and European leaders are not adequately preparing for potential scenarios.

Consequences of U.S. Trade Protectionism and Deficit Spending

The Inflation Reduction Act (IRA) introduced by U.S. President Joe Biden, which uses tax incentives to lure European companies, has raised concerns among European countries. While the IRA aims to accelerate America’s green-energy transition, it is seen as a protectionist trade policy that could trigger adverse economic effects similar to the Smoot-Hawley Tariff Act of 1930.

Alarmingly, both Democrats and Republicans in the U.S. show little interest in cutting government spending or reducing the deficit. Regardless of the party in power after the November election, a deficit-fueled spending spree is expected. However, if real interest rates remain elevated, the U.S. government may be forced to choose between fiscal tightening or pressuring the Federal Reserve to allow inflation.

Conclusion

While the global economy is currently projected to experience a soft landing, recent trends and risks suggest otherwise. The economic challenges faced by China, lackluster European growth, potential consequences of U.S. trade protectionism, and deficit spending are factors that could impact the global economy. As the world navigates another turbulent year, policymakers and analysts must remain mindful of potential risks and challenges.

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