The International Monetary Fund (IMF) thinks the global economy will grow by 3.1% this year and by 3.2% in 2025. The Organisation for Economic Co-operation and Development (OECD) is gloomier, though it has now revised its 2024 forecast up from 2.7% to 2.9%. Both organisations are critical of governments for borrowing and spending too much and taxing too little.
The IMF and OECD recommend more efforts to rein in deficits, stressing the need for continuing tight monetary policies to bring inflation down far enough – and keep it at lower levels once it has adjusted. They both gloss over their own failures to forecast the inflationary surge that hit the advanced countries on both sides of the Atlantic.
The IMF in January 2022 forecast 3.9% inflation for the advanced economies in 2022 and lower for 2023. They spare the US and European Central Bank’s any criticism for their “expand-and-contract” monetary policies. They do not examine how it is that the US went in for a large fiscal stimulus last year, which boosted output but still allowed inflation to come down quickly from high levels.
The OECD has had to become more optimistic about US growth in its latest revision, so is now in line with the IMF on the world’s largest economy. Both see India as the fastest growing of the larger economies. Both see China below 5% growth this year and slower again next year. It is likely China will implement further monetary easing and launch other stimulus measures to avoid too much of a slowdown in 2025 after the disappointment of the post-Covid recovery so far.
Targeting government policy
Both organisations want greater prudence, but also have their preferred areas of protected or greater public spending. They want governments to do more and spend more on the green transition. They recognise the need for more government encouragement to get large changes in behaviour over private transport, home heating and diet.
Both organisations wish to see social programmes protect those on the lowest incomes to cushion the impact of inflation and economic change on the most vulnerable and favour measures to impede tax avoidance and stop evasion and to get sufficient tax from business and well-off individuals. The two groups share the advantage of not having to sell these policies to electorates who are increasingly disenchanted with what conventional politics as the mouthpiece of world wisdom is serving up. For many, the cost-of-living crisis is more immediate than the climate worries.
The dominance of green transition in their thinking is posing problems for the governments they criticise for slow progress. Wherever a government imposes extra green taxes, seeks to favour the relative attractions of green and conventional products through regulation, tax and subsidy, or imposes direct bans it can result in a political backlash.
In the Netherlands, a government was changed in an election following efforts to reduce animal husbandry on farms. In France, there have been several outbreaks of protest over high fossil fuel taxes and prices. In the US, President Joe Biden issued more drilling licences and sold stocks of oil in a battle to get the gasoline price down as it was hurting his poll ratings. He cut the Strategic oil reserve by more than 40%. Donald Trump campaigns against the climate change agreements. In Germany there has been pressure to slow the transition to battery cars.
The world bodies are going to need realism about the speed of the transition undertaken by individual voters and understanding of the political forces at play. Whilst polls show most people think something should be done about climate change, they also show many people object to policies which cost them more or disrupt their lifestyles.
The US election will - in part - be about the green transition.
The green transition can make more rapid progress in areas controlled by large companies. There is substantial progress planned in putting in extra renewable electricity generation and closing more coal power stations. There are plenty of plans for industrial companies to shift more of their activity from fossil fuels to renewable electricity, and to convert their vehicle fleets to batteries or hydrogen.
We are still awaiting the popular consumer products that will trigger a similar shift to electricity on a big scale for home heating and personal transport. The US election will - in part - be about the green transition, with Mr Trump favouring more relatively cheap domestic oil and gas to power more factories and homes.
Growth needs a digital spur
Growth for advanced countries is most likely to come from active embracing the digital revolution. Consumers are fully engaged with smart phones, computer pads and laptops, downloading services from online shopping to entertainment. People will spend more on technology, favouring the service contract model for everything from the broadband line to the home movie.
The US has grown faster and has produced superior stock market performance in recent years compared to most European countries because it has the world’s leading digital businesses. US companies have carved out strong positions in online shopping, search, social media, downloaded films, data storage and processing and the provision of the electronic devices.
They are now defining and advancing artificial intelligence as an enhancement of service which means bigger demands for computer power and storage. China is building a rival system of its own as the world’s two largest economies go head-to-head in a technology struggle. Countries such as the Republic of Ireland, which attract substantial US inward investment for regional roll out of their digital services, also grow well and sustain higher per capita gross domestic product.
The consensus around reasonable growth of about 3% this year for the world economy looks sensible. It is allied to falling inflation as the US and European monetary squeezes have their impact. Chinese inflation remains low. Interest rates in most countries are on the way down, though a bit more slowly than markets have been hoping.
The pattern of growth will reflect the changing technology as the forces of the green transition and the digital revolution play out amongst businesses and consumers. The world will see slower progress on trade than in the pre-Covid years, as more countries seek to onshore their activities and as war and terrorism disrupt the flow of sea containers.
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