JACKSON: Record levels of government debt, geopolitical tensions that threaten to split the global trading system, and the likely persistence of weak productivity gains may saddle the world with a slow-growth future that stunts development in some countries even before it starts.
That sobering view of a post-pandemic global economy emerged from research organised by the Kansas City Federal Reserve and debated here this past weekend. It explored issues like the outlook for technological innovation, public debt, and the state of international trade at a time when the Russian invasion of Ukraine and conflict between the US and China have eroded a once-broad global agreement, at least in theory, to boost the free flow of goods and services.
“Countries are now in a more fragile environment. They’ve used a lot of their fiscal resources to deal with a pandemic...Then you have policy-driven forces, geoeconomic fragmentation, trade tensions, the decoupling between the West and China,” International Monetary Fund chief economist Pierre-Olivier Gourinchas said in an interview on the sidelines of an annual Fed conference here. “If we get to a point where part of the world is stuck without catching up and has large amounts of population, that creates tremendous demographic pressures and migration pressures.”
Gourinchas said it is possible that global growth settles into a trend of around 3 per cent annually, a figure far below rates above 4pc seen when rapid advances in China’s economy drove global output higher and which some economists consider borderline recessionary in a world where quick gains should still be achievable in large, less-developed countries.
But in the emerging pandemic economy, “the global growth environment has become very challenging,” said Maurice Obstfeld, a former IMF chief economist and now a fellow at the Peterson Institute for International Economics in Washington.
China is now suffering what may be chronic economic problems along with a shrinking population. Emerging industrial policies in the US and elsewhere are reordering global production chains in ways that may be more durable or serve national security ends, but also be less efficient.
The symposium is among the first major attempts to take stock of longer-term economic developments after the pandemic and amid renewed geopolitical tensions after years in which officials were at first preoccupied with fighting Covid-19 itself, then had to focus on a global breakout of inflation.
Economists and policymakers here appeared in rough consensus that two trends from before the pandemic, both with global-growth implications, had been intensified by the health crisis and other recent events.
After rocketing higher during the Global Financial Crisis 15 years ago, the ratio of public debt to world economic output has grown to 60pc from 40pc thanks to pandemic spending and is likely now at a level where serious debt reduction is not politically feasible, Serkan Arslanalp, an economist at the International Monetary Fund, and Barry Eichengreen, an economics professor at the University of California, Berkeley, wrote in a paper.
The implications of public debt that is “here to stay” varies by country, they said, with higher-debt but higher-income nations like the US likely able to muddle through over time, while smaller nations perhaps face future debt crises or binding fiscal constraints.
Published in Dawn, August 29th, 2023
