cinternal banks have embarked on austere monetary policies to suppress inflation. Concerns about the financial system, from the bond markets to commercial real estate and the health of the banks, are ever-present. This year, about 4 billion people will go to the polls, with unpredictable consequences. Most worrying of all, the world is on fire, with conflicts from Ukraine to Israel to the Red Sea. Other wars, not least in Taiwan, do not seem far away. No wonder analysts speak of ‘polycrisis’, ‘hellscapes’ and a ‘new world disorder’.
And yet, at least for now, the global economy is laughing at these fears. At the beginning of 2023, almost all economists assumed that a global recession was on the way that year. Instead, global GDP grew by about 3%. Early signs indicate that progress will continue at the same pace this year. Data from the bank Goldman Sachs shows that global economic activity is about as vibrant as in 2019. A measure of weekly GDP produced by the OECD, a club of mainly rich countries, finds similar results. A measure of global activity obtained from surveys of purchasing managers (so-called PMI data) indicates strong growth around the world.
Labor markets are even stronger. The unemployment rate throughout OECD remains well below 5%. The share of working-age people actually in jobs, a better measure of the strength of the labor market, is at a record high. Healthy labor markets boost family finances, which have been hit by inflation. The real disposable income of households around the world G7 shrank by 4% in 2022, but is now growing again.
It is true that some countries are doing less well. Chinese growth figures continue to disappoint. Some people coming from Europe are concerned. Germany, which faces the fallout from high energy prices and competition in its famed auto industry from Chinese exports of electric vehicles, may be in recession. But there are also stronger showings. In January, total non-farm employment in America rose by 353,000 – an explosive figure that exceeds almost all expectations. Although Britain was the butt of economists’ jokes when it teetered on the brink of recession last year, the latest PMI Data indicates quite strong growth.
So far, there doesn’t seem to be much evidence that the problems in the Red Sea are derailing the economy. PMI Data shows that manufacturers are experiencing longer delivery times. This is equivalent to ships diverting around the Cape of Good Hope, increasing the length of a journey between Shanghai and Rotterdam from 11,000 to 22,000 kilometers. Yet in almost all economies, shipping costs represent only a small part of the total price of a good. Even the most pessimistic idiots expect a jump in inflation due to the Red Sea disruption, which amounts to little more than a rounding error.
Why is the global economy so oblivious to the new world disorder? High interest rates have managed to reduce inflation from a peak of over 10% in the rich world to around 6%. This not only increases the purchasing power of households; it also lifts their mood. After hitting an all-time low in 2022, consumer confidence in the rich world has risen sharply. The higher financing costs have been tempered by the fact that many household and corporate debts have fixed interest rates.
There’s also a more intriguing possibility: After so many shocking global developments, the world is no longer as concerned about chaos as it used to be. This is consistent with academic evidence, including a recent paper by two Federal Reserve researchers, showing that the hit to output from a spike in economic uncertainty fades after a few months.
All good economists remain vigilant. Higher interest rates could have a delayed impact on growth. An escalation of the war between Russia and Ukraine or the Red Sea could trigger a new round of energy supply shocks, leading to inflation. All bets are off if Xi Jinping decides to move to Taiwan. But on the other hand: falling inflation and a potential boost for the productivity of the generative generation AI might ask GDP accelerate. And the global economy has already shown its resilience. Polycrisis, what polycrisis? ■