The global economy faced a high degree of difficulty in 2023, but it earned high marks.
Defying gravity, growth has continued, and labor markets have remained strong. Defying expectations, inflation has declined significantly amid the ongoing expansion.
Intricate policy gymnastics have been required to achieve these outcomes. Ascending from pandemic depths demanded considerable lift; taming inflation has required careful twists and turns. The last element of the routine is a dismount that leaves the global economy upright.
The soft-landing narrative has considerable allure, but the three-year-old expansion is vulnerable. Higher interest rates are exacting an increasing toll, and the cycle has been challenged by an unsettling series of unfortunate events.
Following are several main themes that will test our balance.
Western central banks have been aggressive in their efforts to bring inflation back to desired levels. Significant progress has been made, but the job is not yet done.
Monetary authorities will have to weigh the risks of reflation with the risk of damaging economic activity and financial markets. Nothing has crashed yet, but some market participants have stumbled. We expect a gradual descent from peak tightening as we move through the year.
The ability and desirability of governments to accumulate debt received little pushback in the wake of the pandemic. Putting a net under the high wire was essential, and the cost of borrowing was de minimis.
How times have changed. Economic recoveries have been much more rapid than expected, leading interest rates upward. Governments find themselves struggling more mightily to service and sustain their debts, leading to fiscal and political friction. These strains will raise the stakes for key elections to be held in 2024.
By many accounts, this was to have been the Asian century. Western nations, with aging populations and political sclerosis, would find it increasingly difficult to innovate and grow. China, by contrast, had the clarity of government and purpose to vault to new heights.
Central control avoids the messiness associated with democratic direction. But it is difficult to control the natural forces that drive markets. China is learning this the hard way, as it wrestles with economic challenges that will afflict the whole region. The Asian century may be coming to a close, barely a quarter of the way in.
Prosperity begets harmony. But when challenge comes, dissonance rushes in. The stresses introduced by the 2008 financial crisis and the 2020 pandemic have weakened the international order, leading to economic disengagement and geopolitical strain.
Tension within and between countries will continue to favor regional over global associations. Weakened governments and institutions around the world will find it difficult to manage an increasingly challenging set of tail risks.
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