World Economic Focus 2024: Is this the Beginning of the Recovery?

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Over the last two days British media has trumpeted the apparent strength of the Russian economy while simultaneously downplaying the positive inflation figures released by the Bank of England (BoE) this week. The US and the EU contemplate interest rates as they continue to deal with inflationary pressure. China’s economic performance raises questions, while India shows promise ahead of its upcoming general election. In our first economic review, The Level Head will explore the current economic situation of the world’s leading and influential economies.

United Kingdom

UK inflation in March was 3.2%, falling from 3.4% in February. The BoE had expected March interest rates to fall to 3.1% in March, but this is nevertheless the lowest inflation has been since September 2021. Prior to the release of inflation figures on Tuesday investors had betted on interest rate cuts as early as August, but it is now believed rates will not fall until September.

There is cause to view the UK economy with cautious optimism. Inflation is now lower than it is in the US, where inflation has risen to 3.5%. Though Britain’s inflation rate remains higher than that in the Eurozone, it is no longer considered an outlier. Gross domestic product (GDP) figures have improved in 2024 as well. The ONS revised its GDP figures for January, showing that the economy grew by 0.3% that month. The UK economy also grew in February, by 0.1%, meaning Britain is likely to have exited the shallow recession it entered into at the end of last year.

The impact of Britain’s new trading relations – especially with the CPTPP and GCC, neither of which have yet come into force – will be interesting to follow over the second half of the 2020s.

What we have not yet been able to see are the effects of post-Brexit trade deals. Britain already has free trade agreements with Australia, New Zealand, Norway, Iceland, and Lichtenstein. Two other trade deals are in force with Japan and Singapore. Free trade agreements are currently being negotiated with South Korea, Switzerland, India, Canada, Mexico, the Gulf Cooperation Council (GCC), and Israel.

Britain’s membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and its economic partnership agreement with Eastern and Southern Africa (ESA) countries Mauritius, Seychelles, Zimbabwe, Madagascar, and Comoros are exciting examples of the opportunities presented by Britain’s post-Brexit dynamism.[1] The regulatory and customs independence Britain has gained since leaving the European Union must be used to make further agreements with other fast-growing economies, like Brazil and Vietnam.

In Britain, while there is still reason to be cautious and further work by the BoE and the government is required, there is every reason to take the recent figures as a sign that the economy is recovering from the shocks of recent years. The impact of Britain’s new trading relations – especially with the CPTPP and GCC, neither of which have yet come into force – will be interesting to follow over the second half of the 2020s.

Russia

The International Monetary Fund (IMF) has forecast that Russia’s economy will grow by 3.2% this year which, as the BBC says, is ‘significantly more than the UK, France and Germany’. The IMF credits Russia’s relatively high growth, which it predicts will fade to 1.8% next year, to three main factors. High investment, ‘robust’ private consumption, and wage growth in a ‘tight’ labour market are the reasons the organisation gives for Russia’s growth.[2] However, this does not account for the positive effect of war on a country’s economic data.[3]

The Russian economy grew by 4.7% in 2021, the year of the invasion, shrunk by 2.1% in 2022 and grew by 3.6% in 2023. Any economic growth Russia has had in the last three years can be attributed to the war effort. Government spending is at ‘unprecedented levels’ with approximately 40% of the budget spent on the war effort. Putin’s emergency powers, which mandate that businesses supply the Russian military and enables forced overtime, have further stimulated domestic production. In addition, the war effort has facilitated greater mobilization of the working population. Unemployment in Russia fell to 2.9% in October last year,[4] a figure deemed remarkably low by the Russian government.

Russia has been one of the best performing economies in terms of balance of trade since it invaded Ukraine. Russian current account balance was one of the only in Europe to grow from 2021 to 2022, leaping from 6.9% of GDP to 10.5% respectively.[5] Russia was one of only four emerging and developing economies in Europe to have a positive current account in 2023.[6] Of these four, it has the highest positive figure at 2.5% of GDP and is expected to grow to 2.7% in 2024 and 2025. UK and France both have a negative current account at -2.2% and -0.7% of GDP respectively.

The early boost to Russia’s current account may be attributable to the ramping up of domestic production and consumption under Putin’s wartime economic controls. The decline in Russia’s, still strong, current account balance correlates to increasingly strict economic sanctions imposed by foreign countries, increasing imports to prop up the wartime economy, and global economic adjustments in response to the global cost of living crisis. The instability of the Russian economy, effects of sanctions, and the fact that the Ukrainian war seems far from over mean that the future of the Russian economy is bleak. Contrary to the implications of the BBC report, Russia’s high GDP growth does not suggest Russia is economically outperforming the UK.

Western Economies

Inflation and interest rate figures dominate the news in other parts of the world. The chair of the US Federal Reserve, Jerome Powell, has indicated interest rate cuts may be delayed due to persistently high inflation. Stock markets have wobbled since Powell stated that a ‘lack of further progress’ prevented any imminent rate cuts. The IMF has updated its forecast for the US economy, predicting 2.7% GDP growth, 0.6% higher than it predicted in January. Although this is good news, high economic growth causes inflationary pressure that present the Fed with another barrier to rate cuts. There is now uncertainty that interest rates can be cut before the Presidential Election in November. Biden will certainly seek to push through rate cuts prior to election day. Investors should be prepared for premature interest rate reductions if the current President pressures the Fed to make changes in time for the election.

Inflation in the Eurozone fell from 2.6% to 2.4% in March, the lowest it has been for four months. European Central Bank (ECB) President Christine Lagarde was reserved when asked about interest rate cuts. It is highly unlikely a sufficient number of members will be prepared for rate cuts this month. Confidence in the European economy has improved. A survey by the Bank of America has found the approximately 50% of fund managers, rising from 21% last month, expect the European economy to by stronger over the coming year. The number expecting an economic slowdown in European has dramatically fallen from 83% in January to 36%.

China & India

In China, though GDP grew by 5.3%, the IMF still expects China’s growth to be no higher than 4.6%. Chinese industrial production grew by 6.1%, agriculture by 3.8%, and services by 5%. However, its retail sales growth and property investment, two key indicators of the health of the Chinese economy, dropped to 3.1% and by 9.5% respectively.

The Chinese figures are a mixed bag of positive and uncertain news. For many years it has been known that China overestimates figures pertaining to economic performance. While the IMF’s methodology utilizes domestic figures, its incorporation of other data and prediction methods largely compensate for inaccuracies. This means the predictions of strong economic growth in China should be heeded.

However, it is undeniable that the Chinese property market is in trouble. China’s infamous ‘ghost cities’, large uninhabited settlements constructed only to stimulate economic activity, are the biggest symptom of the floundering industry. These cities produce artificial demand and little to no return on investment as apartments and business spaces go unoccupied.

India’s economic growth is expected to ‘remain strong’ this year at 6.8%.[7] The IMF credits India’s ‘robustness’ to ‘continuing strength in domestic demand and a rising working-age population. India’s large and growing population is a driving force of its growth. It is a marked difference in India’s economic make up to other developed economies where the population growth rate is slowing and ageing populations threaten dynamism and productivity. India, along with sub-Saharan Africa, will contribute almost two-thirds of all new entrants to the global workforce in the medium term.[8]

India’s large and growing population is a driving force of its growth.

Over 950 million people in Indian benefit from government welfare schemes, with over 800 million receiving free food. Narendra Modi, whose BJP is expected to win the upcoming general election, has incorporated increasing the welfare system, creating jobs and boosting infrastructure into his election rhetoric. While these high-spend policies may be electioneering, if implemented they will undoubtedly contribute the to the robust economic growth the IMF expects from India in the next few years.

Is this the Beginning of the Recovery?

Overall, the feeling is that the world’s leading economies are showing signs of recovery from the global shocks of recent years. Interest rates remain centre stage in the conversation in leading Western economies. Inflation is subsiding in Europe and the United States, but rising GDP may produce further price rises. There is cause for optimism in the UK as inflation falls to within reaching distance of the BoE target of 2%. The range of trade deals either signed, soon to come into force, or under negotiation present exciting prospects for the UK’s post-Brexit economic future. Inflation has fallen in Europe yet remains persistently high in the US. Neither are ready to lower interest rates and, though rate cuts may be delayed until later this year, it does seem likely that they will come before 2025.

There is reason to be highly skeptical of recent data that shows Russia’s economic outlook in a positive light. Russia’s economic growth is built on wartime mobilization of the economy and does not reveal underlying structural flaws. China remains a curious entity economically speaking. There are signs of economic health on and ailment. A correction in the Chinese property market looms, as it has for over a decade. India, with its large and growing population, is set to be a driver of global growth, both in the global workforce and GDP. Welfare schemes and other domestic spending dominate the rhetoric in the build up to the imminent general election.

Over the coming year it will be interesting to see how artificial intelligence effects the global economy. As discussed in a previous article, states across the world are moving to regulate the emerging technology. Although the AI is likely to bring significant changes to the world economy, it is not yet possible to say what these changes will look like. It will also be interesting to see how changing age demographics effect global competitiveness. India and African countries may be able to leverage their growing populations to their advantage as the labour supply dwindles in other parts of the world.

Ultimately, leading economies are recovering from the economic effects of the COVID-19 pandemic and the global cost of living crisis. As we witnesses major conflict in Ukraine and Israel-Palestine, awaits the rise of artificial intelligence, and continues to deal with the climate crisis, this moment of emergence from the recent crises seems pivotal. It is now up the world’s leading economies to set the agenda for how to deal with these phenomena.

thelevelhead.co.uk

[1] Zambia may fall under the agreement with the ESA in future.

[2] International Monetary Fund, Steady but Slow: Resilience amid Divergence, p.12.

[3] See Vally Koubi, ‘War and Economic Performance’, Journal of Peace Research, 42:1, (2005), pp.67-82 for the effects of war on subsequent economic performance.

[4] The IMF says Russian unemployment was 3.1% for 2023, see International Monetary Fund, Steady but Slow: Resilience amid Divergence, p.35.

[5] International Monetary Fund, Countering the Cost-of-Living Crisis, p.42 and International Monetary Fund, Navigating Global Divergences, p.40.

[6] International Monetary Fund, Steady but Slow: Resilience amid Divergence, p.35.

[7] International Monetary Fund, Steady but Slow: Resilience amid Divergence, p.12.

[8] International Monetary Fund, Steady but Slow: Resilience amid Divergence, p.69.

Sources:

China

• Batarags, Lina, ‘China has at least 65 million empty homes – enough to house the population of France. It offers a glimpse into the country’s massive housing-market problem’, Business Insider, (14 October 2021), <https://www.businessinsider.com/china-empty-homes-real-estate-evergrande-housing-market-problem-2021-10> [accessed:17/04/2024].
• ‘China’s economy beats expectations, growing 5.3 percent in first quarter’, Al Jazeera, (16 April 2024), <https://www.aljazeera.com/economy/2024/4/16/chinas-economy-beats-expectations-growing-five-point-three-percent-in-first-quarter> [accessed:17/04/2024].
• Jennings, Ralph, ‘IMF keeps China’s 2024 GDP growth estimate unchanged on ‘troubled property sector’’, South China Morning Post, (16 April 2024), <https://www.scmp.com/economy/china-economy/article/3259201/imf-keeps-chinas-2024-gdp-growth-estimate-unchanged-troubled-property-sector?module=top_story&pgtype=section> [accessed:17/04/2024].
• Oi, Mariko, ‘China economy grows faster than expected in first quarter’, BBC News, (16 April 2024), <https://www.bbc.co.uk/news/business-68823396> [accessed:17/04/2024].

IMF Reports

• International Monetary Fund, World Economic Outlook: Countering the Cost-of-Living Crisis, (International Monetary Fund Publication Services: Washington D.C., 2022).
• International Monetary Fund, World Economic Outlook: Navigating Global Divergences, (International Monetary Fund Publication Services: Washington D.C., 2023).
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India

• Pathak, Sushmita, ‘Modi’s approach to welfare earns him votes, but does it help India?’, The Christian Science Monitor, (20 March 2024), <https://www.csmonitor.com/World/Asia-South-Central/2024/0320/Modi-s-approach-to-welfare-earns-him-votes-but-does-it-help-India> [accessed:17/04/2024].
• Rajesh, YP, and Shivangi Acharya, ‘India’s Modi promises jobs, infrastructure if BJP wins third term’, Reuters, (14 April 2024), <https://www.reuters.com/world/india/indias-modi-promises-create-jobs-boost-infrastructure-if-bjp-wins-third-term-2024-04-14/> [accessed:17/04/2024].

Russia

• Foucart, Renaud, ‘Russia’s economy is now completely driven by the way in Ukraine – it cannot afford to lose, but nor can it afford to win’, The Conversation, (22 February 2024), <https://theconversation.com/russias-economy-is-now-completely-driven-by-the-war-in-ukraine-it-cannot-afford-to-lose-but-nor-can-it-afford-to-win-221333> [accessed:17/04/2024].
• Islam, Faisal, and Hannah Mullane, ‘Russia to grow faster than all advanced economies says IMF’, BBC News, (16 April 2024), <https://www.bbc.co.uk/news/business-68823399> [accessed:17/04/2024].
• Kasyanchuk, Denis, ‘7 graphs explaining Russia’ wartime economy’, The Bell, (1 December 2023), <https://en.thebell.io/7-graphs-explaining-russias-wartime-economy/> [accessed:17/04/2024].
• ‘Russia’s parliament passes sweeping wartime economic controls’, Reuters, (6 July 2022), <https://www.reuters.com/world/europe/russias-parliament-passes-sweeping-wartime-economic-controls-2022-07-06/> [accessed:17/04/2024].

United Kingdom

• Bruce, Andy, ‘UK economy’s growth points to exit from recession’, Reuters, (12 April 2024), <https://www.reuters.com/world/uk/uk-economy-grows-by-01-february-2024-04-12/> [accessed:17/04/2024].
• Department for Business and Trade and Department for International Trade, ‘Collection: The UK’s trade agreements’, GOV.UK, (2 March 2020; 21 November 2023), <https://www.gov.uk/government/collections/the-uks-trade-agreements> [accessed:17/04/2024].
• Elliott, Larry, and Richard Partington, ‘Bank of England governor shrugs off smaller-than-expected fall in inflation’, The Guardian, (17 April 2024), <https://www.theguardian.com/business/2024/apr/17/uk-inflation-falls-bank-of-england-interest-rates> [accessed:17/04/2024].
• ‘GDP monthly estimate, UK: February 2024’, Office for National Statistics, (12 April 2024), <https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/february2024> [accessed:17/04/2024].
• Inman, Phillip, ‘Sunak hopes of pre-election interest rate cuts frustrated by inflation slow puncture’, The Guardian, (17 April 2024), <https://www.theguardian.com/business/2024/apr/17/sunak-hopes-of-pre-election-interest-rate-cuts-frustrated-by-inflation-slow-puncture> [accessed:17/04/2024].
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Western Economies

• Cingari, Peiro, ‘What do European fund managers think about growth, inflation and stock markets?’, euronews.business, (17 April 2024), <https://www.euronews.com/business/2024/04/17/what-do-european-fund-managers-think-about-growth-inflation-and-stock-market> [accessed:17/04/2024].
• ‘Fed chair Jerome Powell: high inflation likely to delay rate cuts this year’, The Guardian, (16 April 2024), <https://www.theguardian.com/business/2024/apr/16/jerome-powell-inflation-delay-rate-cuts> [accessed:17/04/2024].
• Mena, Bryan, ‘Stocks wobble after Powell warns that rate cuts will likely come later than expected’, CNN, (16 April 2024), <https://edition.cnn.com/2024/04/16/business/chair-powell-discussion/index.html> [accessed:17/04/2024].
• ‘Morning Bid: Blunt Powell signals rate cut plans on ice’, Reuters, (17 April 2024), <https://www.reuters.com/markets/us/global-markets-view-usa-2024-04-17/> [accessed:17/04/2024].
• Ruffino, Greta, ‘Eurozone inflation eases: Trends across the continent and ECB rate expectations’, euronews.business, (17 April 2024), <https://www.euronews.com/business/2024/04/17/eurozone-inflation-eases-trends-across-the-continent-and-ecb-rate-expectations> [accessed:17/04/2024].
• Ziady, Hanna, ‘IMF raises growth forecast for ‘overheated’ US economy and urges caution on rate cuts’, CNN, (16 April 2024), <https://edition.cnn.com/2024/04/16/economy/imf-us-economy-growth-inflation-warning/index.html> [accessed:17/04/2024].