In collaboration with the Financial Times (FT), Eswar Prasad of Brookings and Caroline Smiltneks of Cornell have constructed a set of composite indexes that track the global economic recovery. The Tracking Indexes for the Global Economic Recovery (TIGER) is also featured in the Financial Times. A version of this article also appears in Project Syndicate.
The world economy is losing momentum as its major engines of growth decelerate and a confluence of short-term factors and long-term constraints—including restrictive monetary policy, geopolitical tensions, high public debt levels, and aging populations—begin to bite. The latest update of the Brookings-FT Tiger indexes (Tracking Indexes for the Global Economic Recovery) shows that economic activity is weakening across the board and, despite relatively favorable financial market performance earlier in the year, consumer and business confidence have taken major hits.
The U.S. economy continues to post steady growth, but other advanced economies are in a perilous state, with several facing dismal growth prospects or even teetering at the edge of recession. Emerging market economies are generally in better shape, with China’s economy showing some signs of stabilization and India continuing to power ahead. Inflationary pressures are easing around the world, but rising energy prices and widening geopolitical fissures could halt this progress and affect growth as well. Equity markets had a good run for a few months, partly on account of optimism about productivity gains from technological innovation, but concerns about the frailties of growth prospects have begun to weigh on their performance.
The U.S. economy has proven remarkably resilient but its late-cycle momentum is losing steam. Household consumption and job creation have remained robust although at a slowing pace. To its credit, the Federal Reserve has recovered well from its early stumble and is succeeding in bringing inflation down without tipping the economy into a recession. The economy has weathered high interest rates, rising government debt, political dysfunctionality, and other risks well so far, but strains are beginning to show, especially in financial markets.
Growth in the eurozone remains uneven, with some of the core and periphery economies struggling. The eurozone has adjusted to the negative spillovers from the war in Ukraine and inflationary pressures have eased, although the European Central Bank’s commitment to bringing inflation back to its target will keep monetary conditions tight. Germany has been hit hard by weak external demand and rising foreign competition for its manufacturing sector, barely registering growth. Italy is in similar straits, while France has fared marginally better. Greece and Spain have been bolstered by domestic demand and a resurgence of tourism.
After a post-COVID bounce back, growth in the United Kingdom has been dampened by labor market strife and interest rate hikes to contain inflation. Japan’s economy has been boosted by a weak yen while domestic demand remains restrained. The Bank of Japan seems tolerant of a weak currency and inflation above its target, which will continue supporting growth.
China’s economy, which has been buffeted by a combination of adverse domestic and external factors, is showing signs of stabilization thanks to some monetary stimulus and measures to support the property market. Deflation in consumer prices has been averted for now, although domestic demand continues to sputter and exports are adding little lift. The downturn in the property sector poses a serious concern, as it accounts for significant shares of the economy’s GDP and household wealth, in addition to heightening financial risks. Private sector confidence has plunged, hurting household consumption as well as private sector investment. With the labor force shrinking, the property sector in limbo despite government support, and geopolitical tensions adding to uncertainty, maintaining growth even in the 4-5 percent range will be challenging in the coming years.
India has solidified its status as the world’s fastest-growing major economy, bolstered by robust exports and domestic investment. India has a young and growing labor force, reasonably orderly monetary and fiscal policies, and is experiencing efficiency gains from digitization. It is well positioned to benefit from shifts in global trade and investment patterns due to geopolitical realignments and is already attracting considerable foreign capital. Improving but still inadequate infrastructure and an unfinished reform agenda encompassing labor markets, the banking system, and public governance, along with high levels of public debt, could, however, hinder realization of this potential.
Brazil and Mexico are among other bright spots as falling inflation and rising exports are boosting their prospects, while Nigeria remains a solid performer. Russia has weathered Western sanctions following its invasion of Ukraine and is eking out low growth, thanks to the demand for its energy exports and despite the strains on its economy from the war.
The strong dollar is creating stresses for many emerging market and low-income economies, some of which, like Argentina, have also been beset by domestic political uncertainty and policy mismanagement. Cooperation among bilateral and multilateral creditors to expedite debt restructuring for low-income countries beset by rising debt servicing costs and tight financing conditions is an important priority.
Structural factors such as unfavorable demographics and high debt levels, in addition to festering geopolitical tensions, have damaged household and business confidence worldwide and dampened private sector demand. The specter of high inflation is receding, although it is premature to declare victory and central banks will need to remain vigilant. The key challenge for governments around the world is to use fiscal policy effectively and take measures to improve the functioning of labor, product, and financial markets to rebuild confidence and enhance productivity, which remains the key to durable long-term growth.