Written by Mohamed A. El-Erian
A call for visionary political leadership at the national level and greater global awareness of our shared challenges.
The world economy’s key growth engines are under strain.
Even before the tragic events in the Middle East, businesses, governments, and investors were already navigating a cloudy global landscape. But the horrific conflict between Hamas and Israel, which has already caused great suffering and claimed the lives of thousands of civilians, including too many children, has added a new layer of uncertainty to the global economy. is bringing about. Even though it is highly unlikely that the geopolitical situation improves rapidly within the region or beyond, deep uncertainty will remain due to five specific economic and financial factors.
First, the world economy’s main growth engine is under strain. With Europe on the brink of recession and China stalling, the US economy has emerged as the main driver of global growth. This will be especially evident in his third quarter of 2023, when his US growth forecasts once again look impressive.
But even the US growth outlook is uncertain. Over the past 15 months, analyst consensus on the direction of the U.S. economy has swung wildly between his four scenarios. Crash landing; Crash landing and non-landing. Currently, the prevailing view is that the U.S. is headed for a soft landing, but there is a good chance that predictions will shift toward a hard landing in the coming weeks.
If the growth story of the world’s largest economy, with its mature institutions and diverse production base, can change so easily, is it any wonder that uncertainty in other parts of the world is even more pronounced? there is no. Rather than resembling the usual bell-shaped distribution of potential outcomes with a single peak and thin tail, the global outlook looks more like a multimodal distribution with thick tails at each end, with extreme This indicates that there is a high possibility that a similar phenomenon will occur.
On the positive side, as Gordon Brown, Michael Spence, Reid Rideau, and I argue in our new book Permacrisis: A Plan to Repair a Broken World, generative artificial intelligence, life sciences, and clean energy Advances include increasing productivity and significantly boosting GDP growth. At the other end of the distribution, there is a risk that a series of vicious cycles will exacerbate the cascading effects.
Second, this journey into an uncertain future is fraught with danger. The most immediate risk is that the U.S. Federal Reserve and other major central banks have belatedly and aggressively raised interest rates to counter inflationary trends they initially misidentified, and that they will remain high. The recent rise in global borrowing costs comes as markets adapt to the possibility. Long term charges.
Third, the persistence of this interest rate outlook increases the risk of economic recession and financial market turmoil. Early signs of this were seen in March when balance sheet mismanagement and lapses in banking supervision led to the collapse of some regional banks in the United States.
Fourth, the global economy and key financial markets, such as benchmark U.S. Treasuries, currently lack important top-down anchors such as growth momentum, confidence in policy signals, and stable capital flows. .
Already weak global growth prospects may well deteriorate as economic policy instruments become subordinated to political and geopolitical considerations. Monetary policy faces credibility threats and real structural uncertainties about the equilibrium level of interest rates and the effects of delayed, highly concentrated rate-hike cycles.
Furthermore, shrinking central bank balance sheets and the lack of an effective policy framework further complicate the challenge of determining an appropriate inflation target in a global economy characterized by insufficient supply-side flexibility. It has become.
As the budget deficit widens and interest payments increase, there is also the question of who will absorb the sharp increase in government bond issuance. For more than a decade, the Federal Reserve has been the most reliable buyer of U.S. Treasuries due to its seemingly unlimited money printing ability and minimal price sensitivity. But inflation and other excesses have forced a shift from quantitative easing to quantitative tightening, and the Fed is now a reliable seller. Overseas buyers also appear to be more cautious, partly due to geopolitical tensions. Many domestic institutional investors, such as pension funds and insurance companies, already hold large amounts of bonds, and are suffering significant mark-to-market losses.
We need visionary political leadership at the national level and increased global awareness of our common challenges.
Without these economic, policy, and technological anchors, the global economy and capital markets would resemble ships in rough and unpredictable seas. This leads to her fifth source of global uncertainty: inadequate responses to long-term crises such as climate change and growing economic inequality. The longer we delay addressing these issues, the higher the ultimate cost. If we do not do enough today, we will face even more complex economic and political obstacles.
As we write in Permacrisis, today’s world is shaped by three persistent failures. repeated domestic policy errors and a constant lack of effective global policy coordination when common challenges require collective action. These failures had serious economic, financial, institutional, sociopolitical, and geopolitical consequences.
That’s bad news. The good news is that we have the ability to solve these problems and turn today’s vicious cycle into a virtuous one. But implementing the major changes needed to achieve this goal will require visionary political leadership at the national level and increased global awareness of our common challenges. Without such leadership, we risk leaving our children and grandchildren a world plagued by economic and financial instability, domestic political instability, and geopolitical turmoil.
Mohamed A. El-Erian, president of Queen’s College, Cambridge University, is a professor at the Wharton School at the University of Pennsylvania. He is the author of The Only Game in Town: Central Banks, Instability, and Recovering from Another Collapse (Random House, 2016) and co-author of Permacrisis: A Plan to (Gordon Brown, Michael Spence, Reid Co-authored with Lidow). Repairing a Broken World (Simon & Schuster, 2023).
This commentary was published with permission from Project Syndicate — Five Key Sources of Global Economic Uncertainty.
Read more: Israel-Hamas war could be a tipping point for fragile financial system
Plus: China is ignoring this painful Achilles heel that threatens economic growth
-Mohamed A. El-Erian
This content was generated by MarketWatch, a Dow Jones Company. MarketWatch is published independently of the Dow Jones Newswires and the Wall Street Journal.
(Ended) Dow Jones News
10-28-23 0924ET
Copyright (c) 2023 Dow Jones & Company, Inc.