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Bleak global economic outlook amid the Ukraine proxy war

By Dan Steinbock | | Updated: 2023-02-10 11:31
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Thanks to the proxy war global growth is expected to decelerate sharply to 1.7 percent in 2023. That’s the third weakest pace of growth in nearly 30 years, except for the global recessions caused by the pandemic and the global financial crisis.

The US, the euro area, and Japan are all undergoing a period of pronounced weakness, and the resulting spillovers are exacerbating other headwinds faced by emerging and developing economies.

Once again, the poorest economies are paying the heftiest bill for the ill-advised policies of the high-income West. The long-term scarring effects of the overlapping adverse shocks of the past three years have led to large cumulative losses, especially with respect to output. These losses will be even larger in a sharper global downturn or recession.

West’s tough 2022 and darker 2023

Currently, the risk of recession casts a dark shadow over the US economy, in which rising food and energy prices, coupled with a tight labor market and the Federal Reserve’s misguided monetary responses, pushed inflation to multi-decade highs in 2022. This was aggravated by the belated and most rapid monetary tightening in more than 40 years; as I projected a year ago.

Overall, the US growth for 2022 slowed to 1.9 percent as substantial fiscal consolidation - worth about 5 percent of GDP - added to monetary headwinds. Worse, growth is projected to slow to recession level in 2023; that’s over 2 percentage points below previous forecasts; the weakest performance outside official recessions since 1970.

With the proxy war in Ukraine in the second half of the year, activity in the euro area fell significantly, due to soaring energy prices and supply uncertainty, compounded by rising borrowing costs. Meanwhile, inflation rose to record highs as the war led to natural gas supply cuts and surging energy prices. Estimated at 1.2 percent of GDP in 2022 and up to almost 2 percent of GDP in 2023, fiscal measures were introduced by European governments to soften the impact of energy price increases. In 2023, growth is forecast to contract, which means a downward revision of over 2 percentage points.

Even the not-so-United Kingdom is struggling with the worst fall in living standards since records began.

In Japan, growth is expected to slow further to 1 percent in 2023. In its quarterly report, the Bank of Japan said 53 percent of people surveyed admitted their wealth had slumped last year compared to 2021; the highest percentage of households reporting financial problems in almost 13 years. Worse, the BOJ expects prices will continue to rise and has doubled its inflation forecast for the coming year to a record 10 percent.

The debt spiral

Ailing and indebted, the West cannot afford the proxy war in Ukraine. Hence, the frantic debt-taking. In the eurozone, government debt to GDP remains close to 100 percent. Ironically, that’s 40 percentage points higher than the region’s own debt limit. In the UK, the figure has doubled since 2008 to almost 100 percent. In Japan, it is the worst among all high-income economies; close to 265 percent, thanks to over two decades of secular stagnation. In the US, the debt ratio has also doubled and is inching toward 140 percent. (That’s over 20 percentage points higher than that of Italy amid Rome’s 2010 debt crisis.) The rising debt as a percentage of the GDP will slow economic growth, push up interest payments to foreign holders of US debt, and heighten the risk of a fiscal crisis. The periodic debt-limit debacle in the US is a just a minor political sideshow to the West’s future debt crisis, which will leave no economy, not even the major ones, unscathed.

Poorest economies, heftiest bill

In emerging and developing economies, growth prospects have worsened substantially, with the forecast for 2023 downgraded 0.8 percentage point to a subdued 3.4 percent. While the West is haunted by energy and food inflation, poorer economies struggle with massive energy disruptions and lethal famines.

As Oxfam reports, since 2020, the richest 1 percent have captured almost two-thirds of all new wealth; nearly twice as much money as the bottom 99 percent of the world’s population. In particular, food and energy companies more than doubled their profits in 2022, paying out $257 billion to wealthy shareholders, while over 800 million people went to bed hungry.

In 2023, the ray of hope in this dire global landscape is China’s reopening. It could offset a decline in other emerging and developing economies. That, however, is predicated on continued easing in US-Sino relations, which is no longer assured. Worse, with historical plunges of world trade, investment and migration, effective de-globalization has potential to transform cold wars to hot ones.

Dan Steinbock is an internationally recognised strategist of the multipolar world and the founder of the Difference Group. He has served at the India, China and America Institute (US), Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).

The opinions expressed here are those of the writer and do not necessarily represent the views of China Daily and China Daily website.

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