Sleepwalking Into a Global Recession
The International Monetary Fund and the World Bank held their Spring Meetings in Washington this month amid growing fears of a prolonged worldwide recession and following a series of reports predicting that global economic growth will continue to slow.
Earlier in April, a World Bank book estimated that global GDP growth will fall below 2% this year and increase to 3% in 2024, before weakening to 2.2% by 2030, down sharply from the 3.5% average rate in the 2000s. The Bank foresees a “prolonged period of weakness” for the global economy following further declines in investment and productivity.
The IMF’s latest World Economic Outlook also warned of historically low growth, increased financial risks, and a “rocky recovery” ahead. The current wave of monetary tightening has slowed inflation but also popped several asset bubbles, triggering an interest-rate risk shock that wounded borrowers and fragile financial institutions. In one extreme (but plausible) scenario examined by the authors, higher interest rates and credit-supply shocks will pull down global growth to 1% this year.
The OECD’s predictions are slightly more pessimistic than the IMF’s, projecting that the world economy will grow by 2.6% this year and 2.9% in 2024, largely thanks to post-pandemic recoveries in China and India offsetting slower growth in the United States, Europe, and Japan. Given the escalating SinoAmerican rivalry, former US Treasury Secretary Lawrence Summers puts the chances of a recession in the US at 70%.
When the US Federal Reserve and the European Central Bank began hiking interest rates last year, developing economies worried about the adverse effects of monetary tightening and a strengthening dollar on the global economy. The current economic slowdown, together with the looming bifurcation of global supply chains, has compounded those concerns. In March, however, following months of quantitative tightening (QT), the Fed injected $300 billion in liquidity into cash-strapped banks to shore up confidence in the financial system following the collapse of Silicon Valley Bank. The move led capital markets to speculate that the Fed may soon revert to quantitative easing (QE) and loosen monetary policy in order to maintain domestic financial stability.
But QE is a double-edged sword. Since the 2008 global financial crisis, the G7 countries’ loose monetary and fiscal policies have led to more than a decade of relative stability for the world’s advanced economies. But they have also led to near-negative nominal interest rates and higher debt levels, fueled speculative asset bubbles, and encouraged investors to forsake longterm investments in favor of chasing short-term yields.
In addition to these trends, the massive monetary expansion that followed the 2008 crisis led to structural changes in the global financial system. First, it changed the composition of assets and liabilities on the balance sheets of central banks, commercial banks, and non-bank financial intermediaries (NBFIs) such as pension funds. According to the Financial Stability Board, the G7 countries’ share of global financial assets fell from 75% in 2008 to 62% in 2020, reflecting the rapid growth of the G20’s other members (the so-called G13).
Second, the QE decade dramatically expanded