As output gaps are closing, growth in major advanced economies are becoming more aligned. Subsequent to a strong 2024, the United States shows increasing signs of cooling, particularly in the labour market. On the other hand, the Euro area is poised to pick up after a nearly flat performance last year. As Kavan Choksi Japan says, that the emerging economies of Asia remain the key engine for the global economy in 2024. After all, the growth in China and India is revised upwards and accounts for almost half of global growth.
Kavan Choksi Japan sheds light on the steady growth of the global economy despite the challenges
As of April 2024, global inflation is projected to slow to 5.9 % this year from 6.7 % last year, which keeps it broadly on track for a soft landing. The progress on disinflation however has slowed in certain advanced economies, particularly the United States. While overall risks are largely balanced, certain downside near-term risks have become more prominent.
First of all, further challenges to disinflation in advanced economies may force central banks, including the Federal Reserve, to keep borrowing costs higher for a longer period of time. This may put the overall growth at risk, with elevated upward pressure on the dollar as well as harmful spillovers to emerging and developing economies. Global ‘headline’ inflation shocks, largely in food and energy prices, may drive inflation surge and subsequent decline across a broad range of countries. However, the good news is that, as the headlice shocks eventually recede, inflation may come down without a recession.
When it comes to disinflation path, wage inflation and service prices are among the prime areas of concerns. Real wages are now close to the pre-pandemic levels in several nations. Unless a further decline is witnessed in goods inflation, rising services prices and wages may keep overall inflation higher than desired. Even if there are no further socks, this may prove to be a major risk to the soft-landing scenario.
Fiscal challenges must be tackled in a more direct manner in this year. The deterioration in public finances has left several nations vulnerable. Credibly and gradually rebuilding buffers and protecting the most vulnerable sections of the society is an important priority. Doing so can help free resources for addressing diverse spending needs, like climate transition or national and energy security. Stronger buffers also provide the fiscal resources necessary for addressing unexpected shocks. With increased debt, slower growth, and larger deficits, it wouldn’t take much for debt trajectories to become significantly more concerning in many areas, particularly if markets push government bond spreads higher, posing risks to financial stability.
As Kavan Choksi Japan says, the focus should be put on improving medium-term growth prospects in a more sustainable manner, with the efficient allocation of resources within and across nations, better education opportunities, greener innovation and stronger policy frameworks. Macroeconomic forces are considered to be the primary determinants of external balances. In case these imbalances are excessive, trade restrictions shall be both costly and ineffective at addressing the underlying macroeconomic causes.
