The World Economy: Look Back and Ahead

Zhang Yuyan,Xu Xiujun
2022 saw a notable slowdown in world economic growth, triggered by short term factors such as tightening macro economic policy, the evolving pandemic, escalating geopolitical conflicts and frequent climatic disasters, compounded by substantial and continuous price increase in developed countries, intensifying competition among major countries, financial market volatility, fast-growing US dollar index, and big swings in commodity prices. Looking to the future, the following dynamics and trends must be closely watched: inflation curbing and soft landing, the spillover of macro policy shifts in the US and EU, massive international sanctions and their effects, politicization of regional economic, trade, scientific and technological mechanisms, and global food crises. In view of the signs in the world economy and considering the possible impact of various factors, the world economic recovery will come under greater pressure in 2023, and a growth below 2.5% would be highly possible.
I.The 2022 world economy in review
Generally speaking, there are ten main indicators of world economic performance: growth, employment, price, debt, capital market, interest rate, foreign exchange rate, trade, investment and commodities.  
First, mounting downward pressure on economic growth. unexpected factors including the evolving pandemic and escalating geopolitical conflicts have exerted mounting downward pressure on the world economy. As a result, international institutions have downgraded their growth forecasts. In October 2022, the International Monetary Fund (IMF) predicted a 3.2% growth of the world economy for 2022, 2.8 percentage points lower than 2021. International institutions such as the World Bank and the Organization for Economic Cooperation and Development (OECD) also revised down multiple times their forecasts for 2022 world economic growth in the past year. According to the IMF estimation, advanced economies would grow by 2.4%, 2.8 percent lower than 2021; and 3.7% for the emerging markets and developing economies, 2.9 percent lower than in 2021. The authors projected a final 3.2% growth for the 2022 world economy, which may even be downgraded to 3%.  
Second, improvement of employment to some extent. In 2022, global job markets kept recovering, and overall unemployment fell to some extent. In January 2022, the International Labor Organization (ILO) reported a 5.9% unemployment rate globally in 2022, down 0.3 percent compared with 2021, but still 0.5 percent higher than in 2019 before the pandemic. Employment in high-income countries recovered to their pre-pandemic levels. Unemployment is projected to be 4.9% in 2022, 0.7 percent lower than 2021 and 0.1 percent higher than in 2019. The statistics of the US Department of Labor indicted a seasonally adjusted unemployment rate of 3.5% in September 2022, back to a low level in more than 50 years. By contrast, employment situation remains serious in low-income countries. Their 2022 unemployment rate is projected to be 6%, 0.1 percent higher than in 2021 and 1.1 percent higher than in 2019. The ILO’s report in August 2022 predicted a 14.9% global youth (15-24 years old) unemployment rate, 0.7 percent lower than in 2021 and 1.4 percent higher than in 2019.
Third, repeatedly record-high prices. Due to the impact of such factors as COVID-19 and the Ukraine crisis, global inflation continued to rise. According to IMF estimates, the global annual average rate of inflation in 2022 is 8.8%, up 4 percent from 2021 and the highest level since 1996. IMF projected that inflation rate in advanced economies would reach 7.2% in 2022, 4.1 percent higher than 2021 and record the highest level since 1983. Although prices fell at the end of the year, they were still at a high level. The US consumer price index (CPI) rise fell back to 6.5 percent year-on-year in December 2022, but still much higher than before the pandemic, according to the Bureau of Labor Statistics. According to Eurostat, the euro zone’s reconciled CPI still rose by 9.2% year-on-year in December 2022. CPI in 23 districts of Tokyo rose 4% year-on-year in December 2022, the highest since April 1982, according to Japan’s Ministry of Internal Affairs and Communications. IMF forecasted a 9.9% inflation rate in emerging markets and developing economies in 2022, an increase of 4 percent from 2021 and the highest level since 2000.
Fourth, continuing high-level debts. According to the Institute of International Finance (IIF), total global debts rose to US$305 trillion in the first quarter of 2022, accounting for 348% of global GDP, and further rose to 350% in the second quarter. The IMF estimated that total government debts in advanced economies would account for 112.4% of GDP in 2022, down 5.5 percent from 2021. Of these, total government debts in the US and the euro zone accounted for 122.1% and 93.0% of GDP respectively, down 6 and 2.3 percent from 2021, while Japan’s total government debts accounted for 263.9% of GDP, up 1.4 percent from 2021. Over the same period, total government debts in emerging markets and developing economies accounted for 64.5% of GDP, up 0.8 percent from 2021.
Fifth, large fluctuation of capital markets. In an increasingly challenging global political and economic context, the turmoil in the global capital markets has intensified in the past two years. In September 2022, global stock market capitalization fell by US$24 trillion from US$110 trillion at the end of March, higher than the contraction between October 2008 and March 2009; the balance of the global bond markets fell by US$20 trillion to US$125 trillion from the end of March, the first bear market since 1946; both have shrunk by at least US$44 trillion, or about half of global GDP.
Sixth, interest rates on an upward track. As inflation continued to rise, the US Federal Reserve (the Fed) raised its benchmark interest rate several times. In 2022, the Fed raised the target range of the federal funds rate seven times, lifting the target range by 425 basis points to 4.25% to 4.50%, the fastest rate hike by the Fed in more than 40 years. The Fed’s aggressive rate hikes triggered a global “wave of interest rate hikes”, with interest rates rising in most major economies.
Seventh, rising dollar index. According to the real effective exchange rate index compiled by the Bank for International Settlements (BIS), the real effective exchange rate index of the US dollar rose 13.7% in October from a year earlier, while the real effective exchange rate indices of the euro, yen and sterling dropped 2.1%, 17.2% and 4.5% respectively year on year.
Eighth, slower international trade growth. In October 2022, the World Trade Organization (WTO) forecasted that the volume of international trade in goods would grow by 3.5% in 2022, down 6.2 percent from 2021. The Kiel Trade Index released by the German Kiel Research Institute reported a price and seasonally adjusted growth of 0.3% for international trade in October 2022, with exports from the US, the EU, China and Russia growing by 1%, -0.3%, 2.4%, and 0.3% respectively. This shows that the growth momentum of international trade is still subdued.
Ninth, sluggish cross-border investment. As global mergers and acquisitions reached an all-time high, global foreign direct investment (FDI) flows totaled US $1.58 trillion in 2021, an increase of 64% over the previous year. Global FDI inflows are expected to decline in 2022 and, in the best scenario, stay at the same level as the previous year. Global FDI flows rose 20% year-on-year in the first half of 2022, but fell 22% in the second quarter, according to the OECD. At present, the performance of global FDI shows that the momentum of growth continues to weaken.
Tenth, volatile energy prices. In the short term, commodity prices are more volatile. According to the United Nations Conference on Trade and Development (UNCTAD), the global commodity price index rose 73.3% year-on-year in March 2022 and fell to 10.4% in October. Global commodity prices are mainly driven by soaring fuel prices. Over the same period, fuel prices rose 115% and 19.7% respectively from a year earlier. But in the medium to long term, commodity price change is moderate.
II.Issues calling for attention in the world economy both now and in the future
There are many factors affecting the operation and trend of the world economy, and new problems will continue to emerge. At present and in the foreseeable future, the following five issues deserve special attention.
The first is curbing inflation and achieving a soft landing. At present, high price levels have left policy makers in major developed economies with no choice but to make curbing inflation a priority. After several sharp interest rate increases, major developed economies such as the US and the EU are still on the path of interest rate hike, and there is a good chance that they will continue to raise interest rates in the short and medium term. While raising interest rates, the Fed has also reduced the size of its balance sheet, which is widely known as “balance sheet shrinking”. Since June 2022, it has been compelled to reduce its asset holdings by US$47.5 billion a month for three consecutive months, and by US$95 billion in the subsequent months. In the next few years, it is expected to reduce its holdings by US$3 trillion. Christine Lagarde, President of the European Central Bank (ECB), said the ECB’s mission is to ensure price stability. In the same context, the ECB is bound to tame inflation by shrinking its balance sheet. As things stand now, the combination of monetary and fiscal tightening policies in the US and the EU has curbed the momentum of escalating inflation. However, the risk of policy shifts in the US and the EU has also grown substantially. Historically, intensifying interest rate hikes to curb inflation have considerable side effects. In 1980, in the face of a 13.6% rise in CPI, the Fed raised interest rates sharply and led to a hard landing for the US economy, which slowed from 5.5% in 1978 to -1.8% in 1982. In October 2022, Bloomberg’s chief economist predicted a 100% chance of recession in the US in the coming year. Although the job markets in the US and the EU are performing quite well at present, the real economy and financial markets in the US and the EU will still face a more severe policy environment in the short and medium term. As such, achieving the dual goals of curbing inflation and soft landing is no easy task for US and EU policy makers.
The second is the spillover effect of macro policy shifts in the US and the EU. In the early 1980s, the Fed’s robust interest rate hike not only led to a hard landing in the US economy, but also resulted in debt crises in more than 40 countries. In the decade that followed, there was little economic growth in many developing countries. The reason is that austerity policies in developed economies are bound to spill over to other countries through international trade and cross-border capital flows. This remains unchanged today. One of the direct consequences of the dollar’s interest rate hike is the flow of money from other countries to the US. To prevent capital outflows, many countries have to raise interest rates to hedge widening spread, which in turn makes it harder to boost their economic growth. The other two direct consequences of the rising US dollar interest rate are: higher international financing costs for other countries, and heavier debt service burdens on countries which have borrowed in US dollars. In particular, the appreciation of the dollar driven by the Fed’s rate hike has magnified the three consequences above. Countries with high indebtedness, openness that does not match their national conditions and fragile domestic markets are bound to suffer from the consequences of currency mismatch, while those that are heavily dependent on imports will have to experience inflation as import costs rise. A slowdown or even a recession in developed economies will naturally reduce their overseas demand and hurt outbound investment. If some of the above negative scenarios develop beyond tipping points, and international institutions or major economies cannot successfully cooperate in prevention and effective response, there may be national and corporate debt defaults, which in turn leads to currency crises, banking crises and financial crises and even international financial upheavals. As the World Bank report in September 2022 shows, if global inflation is reduced to the target of 5%, central banks will need to raise interest rates by another 2 percentage points, which could slow world economic growth to 0.5% in 2023. This means that the world economy will fall into a technical recession.
Third, massive international sanctions and their effects. Since the outbreak of the Ukraine crisis till September 2022, Western countries have imposed about 11,000 sanctions on Russia, and new sanctions are still being introduced. The US and EU sanctions not only have a direct and indirect impact on the Russian economy and related countries, but also have a significant negative effect on the US, Europe and the world. IMF’s latest forecast is that the Russian economy would grow by -3.4% in 2022. This is a better short-term performance than most pessimistic expectations for three main reasons: first, although Europe has significantly reduced imports, the sharp rise in oil prices has brought fortunes to Russia; second, the output of Russia’s state sector accounts for more than 60% of total output, and enterprises supported by the state are in a relatively stronger position to withstand sanctions. Third, Russia, which has been under sanctions for many years, has a certain tolerance for new sanctions. Comparatively speaking, the medium- and long-term impact of sanctions against Russia deserves more attention. Developed countries seek to restrict Russia or even push it out of the energy market. This will not only change the geopolitical and economic structure of oil and gas supply and demand, such as increasing the say and voice of OPEC, especially its major members, but also accelerate global energy transformation, especially in Europe. It may slow the progress towards carbon neutrality goals for decades. The resumption of coal-fired power plants in some European countries is a case in point. The secondary hidden impact is also huge and one of the main manifestations is that many companies that have close ties with Russia have to suspend their trade and investment with Russia for fear of collateral damage. The politicization or weaponization of monetary and financial relations not only disrupts the normal international quotation, settlement and reserve operation, but also weakens people’s confidence in the future. If this continues, world growth will be weighed down and the foundation of the global monetary and financial system will be further shaken.
Fourth, the regional economic, trade, science and technology mechanisms are politicized. One of the highlights of multilateral negotiations was the 12th WTO Ministerial Conference (MC12) successfully held in June 2022. The 164 members finally reached consensus on food security, fishery subsidies and COVID-19 response. In the MC12 outcome document, all parties reaffirmed their commitment to strengthening the multilateral trading system with WTO as the core and reforming the WTO as necessary. At the same time, it should also be noted that the WTO is still in crisis, and the members have differences on the direction, principle, framework and content of WTO reform. MC12 failed to solve major problems such as the repair of the dispute settlement mechanism and outdated and inadequate rules. Although the effective coordination between China and the US has played an important role in making the MC12 possible, it is a different scene in regional economy, trade, science and technology. In May 2022, the US officially launched the Indo-Pacific Economic Framework (IPEF), which excludes China. IPEF is not only an intergovernmental or administrative framework of rules, but also a modular mechanism. It therefore avoids the tedious legislative process and simplifies the long negotiation process. Another example of excluding China is the Trade and Technology Council (TTC) created by the US and the EU in September 2021. In May 2022, the TTC held its second meeting, which stressed in its statement that the US-Europe partnership is the cornerstone of its common strength, prosperity and commitment to freedom, democracy and respect for human rights, and proposed the concept of “friend-shoring”. In August 2022, President Biden signed the 2022 CHIPS and Science Act, which contains provisions restricting normal scientific and technological cooperation between China and the US. The above-mentioned competition among the world’s major economies will undoubtedly have a significant negative impact on global trade and investment and the industrial and supply chains, and ultimately jeopardize the well-being of humanity.
Fifth, the global food crisis. According to the report “the State of Food Security and Nutrition in the World 2022” released by the United Nations Food and Agriculture Organization (FAO) and other agencies, as many as 828 million people in the world will live in hunger in 2021, an increase of 46 million over a year ago, up 150 million since 2019, and 31.9% of women are in moderate or severe food insecurity, compared with 27.6% of men. The number of people whose lives and livelihoods are at risk has increased to 345 million. In 2022, food security has become a top concern in the world. The short-term direct causes are as follows: First, geopolitical conflicts. Russia and Ukraine are both big exporters of wheat, and the Ukraine crisis has a strong shock wave on the global food market. In order to prevent food shortages and sharp increases in food prices, eight countries imposed food export bans in 2022. Second, the output of the main grain-producing areas is unstable because of extreme weather disasters and labor shortage caused by COVID-19. The third is the monopoly of large multinational corporations on global food trade. The world’s four largest grain and oil groups, known as ABCD, which together control 70% of the global food market, with sales of US$330 billion in 2021, are at least responsible for the structural issues in the global food supply. Some of the long-standing problems are mainly waste and global food allocation imbalances. According to the FAO, the world wastes as much as 1.6 billion tons of food each year, worth US$2.5 trillion, of which 1.3 billion tons are edible. Over the past 50 years, industries has used up 30% of the increase in world output. With the gradual decline in food prices and the stabilization of supply, unless there is a major climate and geopolitical crisis, the global food market in 2023 is highly likely to remain stable.
III.World Economic Outlook in 2023
On the whole, the world has moved from low inflation to high inflation. As the long-term cost of allowing inflation is much higher than the cost of controlling prices in the short term, it is imperative to tame inflation, but this may dampen growth and increase stagflation. Whether there will be a stagnant recession in the world depends on three factors: first, whether inflation is entrenched; second, whether monetary policy tightening can bring down real interest rates; and third, the upward spiral of prices and wages. The good news is that this round of inflation has created conditions for the normalization of monetary policy, and the easing of the job market has also provided room for monetary tightening. Even if there is stagflation in the US, it may also be stagflation with full employment. This strange combination needs to be explained by economists, so it is also a new opportunity for theoretical innovation.
At present, short-term challenges and long-term factors are intertwined in the world economy. While short-term factors of uncertainty continue to emerge, some deep-seated and structural problems have become increasingly prominent. The adverse factors facing global growth are significantly more than in the past. The world economy will remain in the doldrums. IMF predicts that countries that account for one third of the global GDP in 2023 will face recession. Looking ahead, the world economic growth will further slow down. In September 2022, OECD forecasted that the world economy would grow by 2.2% in 2023, 0.6 percent lower than its forecast in June. The IMF forecasted in October shows that the world economy will grow by 2.7% in 2023, 0.5 percent lower than in 2022, with developed economies growing at 1.1% and emerging and developing economies at 3.7%. In January 2023, the World Bank revised down the world economic growth forecast in 2023 to 1.7%, with advanced economies growing by 0.5% and emerging markets and developing economies by 3.4%.
In view of the current signs in the world economy and considering the possible impact of various factors, this paper believes that the recovery of the world economy in 2023 will face greater pressure, which is more likely to be lower than the predictions of the IMF and the World Bank, and that the growth of the world economy in purchasing power parity (PPP) terms may fall below 2.5%. At the same time, the possibility of a sharp decline in world economic growth will not be ruled out. Some major economies may even contract. In the medium to long term, the world economy will be on the track of medium-and low-speed growth. In the next three to five years, the world economic growth will stay at about 3%, the dual-speed growth pattern of developed and developing economies will continue, and the economic growth of different countries and regions will continue to diverge.

Zhang Yuyan is Member of the Academy Board, Research Fellow of the Institute of World Economics and Politics of Chinese Academy of Social Sciences, and Professor of the School of International Politics and Economics of the University of Chinese Academy of Social Sciences.
Xu Xiujun is Research Fellow of the Institute of World Economics and Politics of Chinese Academy of Social Sciences.