It wouldn’t take much to derail the global economic recovery

Its housing crisis remains unresolved and remains a ticking time bomb for its economy and financial system.

Consumers, on whom China’s economic authorities are relying to spur economic recovery, may not welcome the end of the zero-COVID years and will continue to sit on the savings they amassed during the pandemic, despite the early travel and spending data are promising.

The war in Ukraine remains a wild card for the world economy.

The war in Ukraine remains a wild card for the world economy.Credit:AP

The war in Ukraine is ongoing and could intensify, and while Europe has weathered the energy crisis it triggered far better than anyone (including Europeans) expected, it would be premature to say it is permanently ending the threat to businesses and households has cut off access to Russian oil and gas.

Inflation rates appear to have peaked, but they remain uncomfortably high in advanced economies, which means interest rates will also remain uncomfortably high and slow growth.

In most economies, interest rates, despite approaching their peaks, are still rising, hurting consumers and businesses, particularly heavily indebted households and businesses.


Liquidity in major financial markets remains low and financial conditions volatile, fragile and vulnerable. The recent debate over the debt ceiling in a bitterly divided and highly unpredictable US Congress underscores how easy it would be for a single event to trigger another global financial crisis.

Beyond the war, geopolitical tensions in Europe and particularly between the US and China remain high.

There are therefore just as many reservations about the views of the IMF and others that this is the year that promises clearer skies for the global economy.

Still, recent economic data is promising.

Last week, the US announced that its economy grew a modest but solid 2.1 percent over the past year. The IMF is forecasting weaker GDP growth of 1.4 percent for this year, but not the recession that many are still expecting.

This week, the European Union’s economic statistics agency announced that the eurozone economy grew 0.1 percent in the last quarter of 2022.

What Jerome Powell's Fed and other central banks are doing with interest rates could quickly change the IMF's outlook.

What Jerome Powell’s Fed and other central banks are doing with interest rates could quickly change the IMF’s outlook. Credit:AP

It’s still flirting with a recession and some of its economies, like Germany, are experiencing a slowdown, but the region has so far weathered the worst of the war in Ukraine and the European Central Bank’s tightening of monetary policy and (thanks to a strong contribution from Ireland). avoided the deep recession that many believed was inevitable.

The IMF forecasts economic growth in the euro zone of 0.7 percent this year and 1.6 percent in 2024, i.e. more of stagnation than recession.

What central banks do in the US, Europe, China and elsewhere will be as influential this year as any other factor in determining outcomes for individual economies and the global economy.

Also this week, China’s January PMIs showed the surprising strength of the initial rebound in activity after the zero-COVID policy was abandoned.

The services PMI rebounded from 39.4 (anything below 50 signals a contraction in activity) to 54, the first time it has been back in positive territory in almost six months. The manufacturing index rose to 50.1 from 47 in December. There is definitely a recovery underway.

China’s economy grew 3 percent last year, anemic by Chinese standards, and even that official figure was viewed with some skepticism.

The IMF sees growth of 5.2 percent this year and 4.5 percent in 2024, which is not at odds with private sector forecasts and would help underpin strong growth elsewhere in Asia.

Overall, the IMF outlines the outlook for relatively modest but generally positive growth, with the exception of the still Brexit-hit UK, where it forecasts a 0.6 percent contraction for this year and only 0. 9 percent forecast.


Of course, the US Federal Reserve Board could make some of Thursday’s forecasts obsolete when it announces its latest interest rate and monetary policy stance. It’s expected to hike its federal funds rate by 25 basis points — the eighth hike in a cycle that began less than a year ago — but the focus is more on what it says than what it does .

The perceived risk is that the Fed will turn more hawkish, sending the message that rates will end higher and stay there longer than financial markets are currently expecting and pricing in.

A bearish surprise could spark a tantrum in bond and equity markets, which anticipate a downtrend in US interest rates in the second half of this year. It would also put pressure on other central banks to raise interest rates longer than they otherwise would have done.

In fact, what central banks do in the US, Europe, China and elsewhere will be as influential as any other factor in determining individual and global outcomes this year. Without a turning point in monetary policy in the major economies, particularly the US, it is hard to see a positive turning point for their economies or those of the world.

The Business Briefing newsletter delivers important stories, exclusive coverage and expert opinions. Sign up to receive it every weekday morning. It wouldn’t take much to derail the global economic recovery

Brian Lowry

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