Analysis and Prospects of the World Economic Situation 2023-2024

Zhang Yuyan Xu Xiujun

At present, the growth momentum of the world economy is clearly insufficient, and faced with many unstable, uncertain and unpredictable factors, the world economy is generally on a downward path. From the perspective of trend changes, the world economy will still be in the process of reshaping its growth momentum in 2024, with positive factors accumulating but downward pressure remaining.

Review of the Overall Situation of the World Economy in 2023

The year 2023 was a year of turbulence, polarization and change. Under the intertwined influence of various factors, the downward trend of the world economy has become an expected trend. The International Monetary Fund (IMF) estimates that the world economic growth rate to be 3.0% in 2023, a decline of 0.5% from 2022. During the same period, the developed economies are under greater economic downward pressure, with a growth rate of only 1.5%, down 1.1% from 2022. Thanks to the boosting effect of the Chinese economy, the economic growth of emerging markets and developing economies slowed down to a lesser extent, with a growth rate of 4.0%, down by only 0.1% from 2022.

In terms of employment and prices, the global situation has improved in 2023 compared to 2022. In May 2023, the International Labour Organization (ILO) revised its estimate of the global unemployed population significantly, with the global unemployed population in 2022 revised downward from the previous estimate of 205 million to 192 million; it is projected to fall further to 191 million in 2023, with unemployment rate of 5.3%, a decrease of 0.1% compared to 2022. The pace of global employment recovery in the aftermath of the COVID pandemic has been faster than that of the 2008 international financial crisis. Unemployment rates in all but low-income countries have generally declined to pre-pandemic levels, and in some countries are even at record lows for the past several decades. Against the backdrop of continued monetary policy tightening in major advanced economies, the grim situation of global inflation has eased significantly. The IMF estimates that the global average inflation rate will be 6.9% in 2023, a decline of 1.8% compared to 2022, and the year-end inflation rate will be 6.4%, a decline of 2.5% compared to 2022. The decline in global commodity prices is one of the main factors driving the fall in prices. IMF data show that the global commodity price index stood at 164.45 in November 2023, down 14.4% from the year earlier, and down 32.0% from the high in August of the previous year. However, the current level of inflation in major developed economies is still well above central bank inflation targets, which means that monetary policy in major developed economies such as the United States is working but with limited effect.

Against the backdrop of economic downturn and monetary policy tightening, global debt risk is accumulating at a high level. Since 2023, global debt levels have continued to climb, especially in major developed countries such as the United States. The scale of debt has repeatedly reached record highs. In September 2023, a report released by the Institute of International Finance (IIF) showed that global debt increased to a record $307 trillion in the second quarter of 2023, with the ratio of global debt to GDP increasing from $4.5 trillion to $6.5 trillion. The ratio rose for the second consecutive quarter to 336%. Notably, this uptick comes after seven consecutive quarters of declining debt ratios. More than 80% of new debt in the first half of 2023 came from developed countries, with the largest increases in the United States, Japan, the United Kingdom, and France. Under the impact of the continued tightening of monetary policy in developed economies and other factors, many emerging market countries have experienced capital outflows and currency depreciation, and debt risk has risen sharply. Since 2023, some emerging market countries with a higher proportion of external debt and more fragile economic fundamentals and financial systems have faced a higher risk of debt default, and some countries have even experienced debt crises. If inflationary pressures continue to increase, central banks in advanced economies may raise interest rates further, which would further push up global debt risks and trigger a financial crisis.

Despite the gradual receding of the impact of the pandemic on global trade and investment activities, international trade and investment growth is still under considerable downward pressure. In October 2023, the World Trade Organization (WTO) released forecasts showing that global trade in goods to grow by 0.8% year-on-year in 2023, a significant downward revision from the April forecast of 1.7%. The WTO also warned that signs of fragmentation in global supply chains are beginning to emerge and will continue to pose a threat to global trade. The situation for global investment growth is even less optimistic. In January 2024, the United Nations Conference on Trade and Development (UNCTAD) released its Global Investment Trends Observatory, which showed that global foreign direct investment (FDI) fell by 12% year-on-year in 2022 to $1.3 trillion; global FDI in 2023 is estimated to be $1.37 trillion, an increase of 3% from 2022. Despite this better-than-expected result, economic uncertainty and high interest rates had a significant negative impact on global investment.

In addition, global financial markets were volatile, mainly in the foreign exchange and equity markets. At the end of October 2023, the US dollar index rose to 106.7, up 3.1% from the end of the previous year, and then fell back to 103.5 at the end of November, unchanged from the end of the previous year. Many national currencies have experienced a further decline in exchange rates since 2023. The global stock market has become more polarized and oscillating. While stock markets in Argentina and the United States have risen sharply, stock markets in Thailand and Finland have experienced big falling.

Main Features of the World Economy in 2023

The world economy in 2023 is generally on a downward trend, with some new unstable and uncertain factors emerging, and some new situations and changes warranting attention. Overall, there are mainly five features of the world economic operation in 2023.

I. Increased Divergence in World Economic Growth

Despite the severe impact of the international financial crisis in 2008 and the COVID pandemic since 2020, the pattern of two-speed growth of the world economy has not changed. In October 2023, IMF estimates show that in 2023, the economic growth rate of emerging markets and developing economies was 2.5% higher than that of developed economies, and the speed difference widened by 1% compared with that of the previous year. The average annual economic growth rate of emerging markets and developing economies in the next five years is expected to be 4.0%, which is 2.3% higher than that of developed economies. Within the two major groups of emerging and developing economies and developed economies, the divergence in economic growth has intensified. The divergence of global economic growth means that the economic policies of various countries are oriented towards different goals and tasks, and the difficulty of global macro-economic policy coordination continues to increase.

II. Disruptive Technologies Bring Profound and Complex Impacts

Confronting the wave of the fourth industrial revolution, new industries, new business forms and new models based on new technologies continue to emerge, and the disruptive impact of the increasingly widespread application of artificial intelligence (AI) technology on the worlds economy and society is looming. Enterprises are scrambling to apply every new breakthrough in the field of AI to production, from simultaneous interpretation, personal assistants and drones to surveillance devices and lethal autonomous weapons, all of which have been profoundly transformed by AI. Currently, ChatGPT has become the worlds fastest-growing AI product in terms of the number of users, and is driving breakthroughs in generative AI tools in the fields of image, video, programming, voice, etc. In October 2023, China duly put forward the Global Initiative on Artificial Intelligence Governance, which emphasizes that all countries should strengthen the exchange of information and technological cooperation in the field of AI governance, work together to prevent risks,,form an AI governance framework and standardized norms with broad consensus, and continuously improve the safety, reliability, controllability and fairness of AI technology.

III. Accelerated Rise and Spread of Discriminatory Regionalism

In times of major challenges to economic globalization, regional economic cooperation has emerged as an alternative option for promoting trade and investment liberalization and facilitation. However, IMF research has found that discriminatory regionalism is on the rise, especially in times of conflict, and that regional trade agreements may build up walls against the outside world rather than lowering internal walls. In addition, discriminatory regionalism may also give rise to non-trade objectives such as raising labor and environmental standards, adopting domestic rather than global standards, and realigning supply chains for national security reasons. In May 2023, Trade ministers of the 14 member states of the U.S.-led Indo-Pacific Economic Framework (IPEF), signed an agreement on supply chains. The IPEF aims at deepening U.S. economic cooperation with its partners in the Indo-Pacific region and improving U.S. global competitiveness. This flexible supply chain agreement, touted by the Biden administration as “the worlds first multilateral supply chain agreement”, is not open to some of the regional countries, and the content of the agreement has been kept secret, which is a concrete manifestation of discriminatory regionalism in the Asia-Pacific region. Thus, strengthening ties with partner countries while drifting away from non-partner countries has become a policy choice for some big countries to promote regional cooperation.

IV. The Risk of Global Economic Decoupling Exacerbated by De-risking Policies

Since 2023, Europe, the United States and other advanced economies have launched the so-called de-risking policy. In May 2023, the Group of Seven (G7) summit in Hiroshima, Japan, issued a joint statement claiming that in order to enhance economic resilience, it is necessary to de-risking and realize diversification. At the same time, the G7 declared that it was not seeking decoupling or internalization of policies, and that it had no intention of impeding Chinas economic development. Since then, some developed countries have also released specific de-risking and reducing dependence initiatives. These so-called de-risking policies have essentially decoupled the global economy. In October 2023, the IMF released a study showing that the negative impacts of the major economies de-risking strategies would spread beyond China, whereas Chinas comprehensive reforms could generate significant positive spillovers. This kind of de-risking policy to maximize their own advantages and quickly suppress their so-called rivals will push the relationship between major countries further away from win-win cooperation, and even beyond the zero-sum game towards a negative and game at the cost of their own interests and the opponents interests.

V. Cooperation on the Belt and Road Initiative Starts a New Journey of the Golden Decade

The year 2023 marks the 10th anniversary of the Belt and Road Initiative, which has achieved fruitful results and played an important role in promoting world economic growth and global sustainable development. In October 2023, the Third Belt and Road Forum for International Cooperation was successfully held, with representatives from 151 countries and 41 international organizations coming to China to participate in the forum and embark on a new journey of the Golden Decade of the Belt and Road cooperation. At the opening ceremony of the forum, China announced that it would build a three-dimensional Belt and Road connectivity network, support the construction of an open world economy, carry out practical cooperation, promote green development, promote scientific and technological innovation, support civil society exchanges, build a clean road, and improve the Belt and Road international cooperation mechanism. The eight actions proposed by China are in line with the forums recommendations, including supporting the construction of a high-quality Belt and Road network. The eight actions proposed by China and the 458 outcomes reached by all parties during the forum will provide a strong impetus for promoting world economic growth and global common development.

Trend Changes in the World Economy

Driven by factors such as external shocks and internal kinetic energy transformation, the world economy has entered a period of deep change and presented some trend changes with far-reaching implications. Specifically, these changes are mainly manifested in the following five aspects.

I. The World Economy Re-Globalization

As the worlds largest economy, the U.S. frequently starts trade wars with other countries, impedes the normal operation of the multilateral trade mechanism, and jointly implements the “near-shoring outsourcing” and “friendly-shoring outsourcing” policies with its allies, seriously interfering with normal international economic and trade relations. At the regional level, some mechanisms and rules have become increasingly exclusive, accelerating the reconstruction of the global industrial chain and supply chain; at the global level, the function of the multilateral trading system has been further weakened. Although the international community is looking forward to the 13th WTO Ministerial Conference in 2024 to rebuild the multilateral trade rules system, more efforts are needed to achieve substantive results. Driven by these factors, the global economy will undergo the process of re-globalization, i.e., the global rules will be reformed and reshaped due to the upgrading of the big power game, global resources will be reallocated, and the global division of labor system will be systematically restructured.

II. Digitalization of Global Production and Exchange

In global technological innovation, the field of information and digitalization is one of the fields with most of the technological breakthroughs. With the increasingly widespread application of digital technology, new industries, new forms of business and new modes continue to emerge, driving the rapid growth of the digital economy and trade. The White Paper on the Global Digital Economy (2023), released in October 2023, shows that the total digital economy of the five countries of the United States, China, Germany, Japan, and South Korea accounted for 58% of the GDP in 2022, an increase of about 11% compared with 2016. Meanwhile, digital technology directly drives the development of e-commerce, and cross-border digital service trade also shows rapid growth momentum. Global digital service trade reached $3.82 trillion in 2022, up 3.9% year-on-year. Digital technology will become an important basis for reshaping the power of the global economy. The development of the digital economy and digital trade has broad prospects, and the development and application of digital technology in developing countries will especially create a huge market for the world.

III. Decarbonization of Global Economic Development

Extreme weather events such as storms, heat waves, floods and droughts are frequent, and human survival and development are facing serious challenges. Germanys Copernicus Climate Change Service pointed out that 2023 may become the hottest year on record. Climate change is not only a direct threat to human health, but also has a far-reaching impact on the way of life and production of human beings, and the development of a low-carbon economy has become an inevitable choice for all countries. It is worth noting that climate change poses greater challenges to developing countries. The World Banks Country Reports on Climate and Development show that the global average cost of implementing a low-carbon development strategy is about 1.4% of GDP, but the cost for low-income countries exceeds 5% of GDP. Developing countries do not have the opportunity to develop in a highly carbon-intensive manner before rehabilitation and decarbonization, as developed countries have done.

IV. Politicization of International Economic and Trade Relations

Some developed economies are increasingly keen to view international economic and trade relations from the perspective of geopolitics and national security, and give normal economic and trade relations a heavy political color, advocating economic security threats on internal and external occasions. For example, in economic and trade cooperation mechanisms such as the United States-led IPEF, issues such as human rights, ideology and values, and the political system are taken into account as important elements and used as means of shaping cohesion of members and restricting other members. At the same time, for political considerations, certain countries have deliberately obstructed the reform process of the WTO, IMF, the World Bank and other mechanisms, and speculated on political issues in global and regional economic governance platforms, interfering with the normal operation of these mechanisms.

V. Diversification of the International Monetary System

More and more countries are embarking on the implementation of the de-dollarization program, which is manifested in giving up the use of the U.S. dollar in cross-border trade and investment and switching to local currency settlements, reducing the share of the U.S. dollar in foreign exchange reserves and starting to think about alternative currencies to the U.S. dollar. According to the IMF data, the proportion of U.S. dollar reserves to the worlds reported foreign exchange reserves was 58.36% in the fourth quarter of 2022, lowest since 1995 when this statistics started, and down by 14.34% from the high point in the second quarter of 2001. At the same time, the competitiveness of the RMB has increased. In September 2023, the RMBs share of the trade financing market as a global currency amounted to 5.80%, for the first time to take second place and overtaking the euro which had a share of 5.43 percent. Although the process of de-dollarization is accelerating, the real diversification of the international monetary system will still be a long process.

The World Economic Outlook for 2024

At present, the global inflation problem has been alleviated, but there are still many short-term and long-term factors leading to the downward trend of the global economy, while the factors driving the global economic trend still exist.

Factors affecting the global economic downturn mainly include: the tightening effect of monetary policy adjustments in major economies such as the United States and Europe has gradually emerged, the resilience and stability of the financial systems of developed countries have been challenged, the risk of governmental or corporate defaults continues to climb, the supply chain at the corporate and national levels continues to be adjusted, trade protectionism and resource nationalism are still prevalent, and the competition among major countries is increasingly shifting to a negative-sum game in which all parties suffer damage. The labor supply of major economies is gradually decreasing, the impact of technological progress on economic growth and stability is full of uncertainty, the cost of decarbonization of the global economy is still too high. Further more, there are still the long-term negative impact of pandemics and the outbreak of geopolitical conflicts such as the crisis in Ukraine and the Israeli-Palestinian conflict. The evolution of all the above factors could have a negative impact on the global economy and jeopardize the momentum of global economic growth. The positive trend of the global economy mainly comes from some emerging economies with a good foundation and high potential for development, and these economies are playing an increasingly important role in leading global economic growth.

In view of the above, there is room for the world economy to go down in 2024. In June 2023, the World Bank projected that the world economic growth rate in 2024 would be 2.4%, a downward revision of 0.3% compared with the January forecast. In September, the Organization for Economic Cooperation and Development projected that the world economic growth rate in 2024 would be 2.7%, which would be 0.3% lower than the 2023 rate. In October, IMF forecast data show that the world economic growth rate in 2024 is 2.9%, down 0.1% from 2023, of which the economic growth rate of developed economies is 1.4%, the United States is 1.5%, the euro region is 1.2%, Japan is 1%; economic growth rate of the emerging markets and developing economies is 4%, the same as in 2023, of which, China stands at 4.6%, India at 6.3%, Brazil at 1.5%, Russia at 1.1% and South Africa at 1.8%.

Overall, there are many factors affecting the world economic situation in 2024, and one of the key variables is whether the worlds major economies can work together to address the various global economic challenges. In particular, the uncertainty of U.S. foreign economic policies brought about by the U.S. election will have a direct impact on global economic policy and the international cooperation environment, and global economic risks and challenges may increase significantly as a result. According to the current situation, the world economy will remain on a medium to low growth track in 2024, with a world economic growth rate of 2.7% based on purchasing power parity. The economic growth rate of emerging markets and developing economies will still be significantly higher than that of developed economies, and the possibility of significant economic fluctuations in major developed economies, such as the United States, leading to a significant decline in world economic growth, cannot be ruled out.

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Zhang Yuyan is Member of the Chinese Academy of Social Sciences and Director of the Institute of World Economics and Politics, CASS;

Xu Xiujun is Researcher of the Institute of World Economics and Politics, CASS