[Column] Three variables for the 2023 global economy

Mines are everywhere in the global economy. Policy-makers must keep their eyes wide open to navigate a soft landing as our economy cannot be separated from the global economy.

Lee Sang-ryeol

The author is an editorial writer of the JoongAng Ilbo.

A harsh winter is ahead for the global economy. The common enemy for all economies in 2023 will be stagflation, a grim mix of economic stagnation and high inflation. Estimates increasingly bet on the global economy growing at a slow pace of 1 percent next year.

The Institute of International Finance (IIF) has given a shocking 1.2 percent estimate for 2023 global growth — one fifth the 6 percent gain in 2021 — and less than half of this year’s 3.2 percent estimated by the International Monetary Fund (IMF). The IMF is expected to join the skeptical group. On Dec. 1, Managing Director Kristalina Georgieva said the chance of global growth falling below 2 percent next year is increasing.

The global economy has grown under 2 percent only twice since 2000 — a negative growth of 1.3 percent in 2009 in the wake of the global financial meltdown and negative growth of 3.3 percent in the Covid-19 pandemic year of 2020.

What about prices? The IMF projected a global inflation rate of 6.5 percent for next year. Although that would be a drop from this year’s estimated 8.8 percent, price gains will remain steep. In its outlook in November, the Organization for Economic Cooperation and Development (OECD) forecast 6.0 percent average for inflation for the Group of 20 economies for next year. That rate is sharply higher from 1 to 2 percent levels in major economies before the pandemic.

Central banks around the world have been aggressively bumping up interest rates to tame inflation. Still, prices remain far above pre-pandemic levels. Interest rates will likely stay high unless prices come down. An economy moving in slow motion of the 1 percent range and prices in the 6 percent range spells stagflation.

The world economy is under multiple layers of clouds. The biggest dangers for the economy next year boil down to three factors: the outcome of the Russia-Ukraine war, the results of China’s strict Covid-19 policy, and a possible colossal debt crisis.

Chinese people are lining up for Covid tests in Beijing, Dec. 4. [EPA/YONHAP]

Ongoing energy crisis The impact of the Ukraine war can be understood by asking, “What if there had not been a war?” If Russia had not invaded Ukraine in February, the biggest global energy crisis since the oil shock of the 1970s would not have occurred. International crude prices soared to $98 per barrel this year from last year’s average of $69 after Russia weaponized energy for its war. Natural gas was hit harder. The European Union relied on Russia for 40 to 50 percent of its natural gas. Prices soared after Russia tightened the pipelines to the EU. According to The Economist, prices of natural gas for shipments in the first quarter of 2023 averaged 125 euros per megawatt hour, about six times higher than the previous year.

The jump in natural gas prices has hurt member countries of the OECD. The share of energy expenditure against gross domestic product (GDP) of OECD members shot up to 17 percent. A recession followed when the energy share exceeded 13 percent of the GDP over the last half a century.

The Ukraine War may pan out in three directions. One, Russia could end the war in an overwhelming triumph. Two, Ukraine could completely defeat Russia. Three, the war could be stalemated for a lengthy period. For now, neither Russia whose president’s political life is at stake nor Ukraine with the strong support of the West will easily surrender. The conflict is likely to last throughout next year. The Bank of Korea (BOK) based its growth outlook (2.2 percent) for the Korean economy on a protracted war and energy crisis in Europe.

Ending zero Covid The Chinese economy was extremely sluggish this year. The IMF projects its growth to be 3.2 percent, slightly lower than the 3.3 percent projected by the OECD. China’s growth will be the smallest in 30 years except for the first pandemic year of 2020 when the figure stood at 2.2 percent. The primary cause of the slowed growth was strict lockdowns by Beijing. Due to stringent lockdowns, consumption and manufacturing nearly came to a standstill.

The outlook for next year is not promising. The IMF expects China to grow 4.4 percent, which would be sharply weaker in comparison with its 6.7 percent annual average growth from 2015 to 2019. A rebound in the global economy is not possible if China — the world’s biggest manufacturer and spender — slows. The IMF’s Georgieva noted that the global economy owed 35 to 40 percent of its growth to China, but this year and next year that won’t be the case.

One comfort is that Beijing has been showing signs of easing its draconian virus policy in the face of massive rallies protesting the rigid control. Chinese people no longer have to show their negative test results to use public transportation in major cities like Beijing, Tianjin and Shanghai. Mandatory testing has been eased and voluntary isolation granted.

The moves have been long overdue, considering the low mortality rate of new Covid-19 variants. The IMF and other international organizations made the recommendations to loosen government controls on the public. But whether China is sufficiently ready for an orderly withdrawal from the zero-Covid-19 policy is uncertain. Vaccination rates remain low in China and the medical infrastructure is lacking. According to foreign media, only 40 percent of people aged 80 and older have received three jabs. Hospital beds for the critically-ill are only 4.3 per 100,0000 people. Huge confusion may come about if cases surge. One radical simulation saw deaths exceeding 1 million if the vaccination rate is not lifted.

A bigger problem is the fall in public confidence in the central government. Beijing has taken pride in its unique zero-Covid policy over the past three years. But the spell has been broken. If Beijing’s command over the private sector is lost, various hidden problems such as colossal debts of local governments could surface. Cho Won-kyung, a professor at the Ulsan National Institute of Science and Technology (Unist), projected the successful normalization from the stringent mitigation policy could define next year’s economy of China.

Global debt reaching $290 trillion When interest rates rise, debt servicing costs surge. The IIF estimated the aggregate global debt of governments, companies and households to have hit $290.6 trillion as of the end of October, a 28 percent surge from $226 billion in 2020.

Higher interest rates weaken spending capabilities of individuals, companies and governments. Real estate markets around the world have quickly soured. Incomes either should increase to be able to afford the increased interest burden or interest rates must come down. But higher incomes cannot be expected in a weak economy. After setting off the upward spiral in interest rates, Uncle Sam has no intention to ease up. Federal Reserve Chair Jerome Powell said rates will go up. The Wall Street consensus sees the end target range above 5 percent next year. Large debt loads coupled with high interest rates can trigger chain defaults and financial crises. The IMF projected 60 percent of low-income countries are either in a debt crisis or near one. The Council on Foreign Relations (CFR) estimated that the amount of the debt of underdeveloped countries that needs to be readjusted to reach $200 billion.

Financial crises are highly contagious. South Korea fell into liquidity woes in the 1997 Asian financial crisis. Time wrote the global economy is mired in a combination of the 1970s-style stagflation and the 2008-style debt crisis. In the 1970s, stagflation was not accompanied by debt problems. In 2008, inflation was not a worry.

“Low-income countries and emerging economies as well as some advanced countries are under excess debt,” noted Sung Tae-yoon, an economics professor at Yonsei University. “Poor management of the debt could cause tantrums in the financial markets and a negative impact on our economy.”

Mines are everywhere in the global economy. Policy-makers must keep their eyes wide open to navigate a soft landing as our economy cannot be separated from the global economy.