The global economy dodges the abyss but faces a troubled path

ECB President Christine Lagarde this Thursday at the Davos Forum. DPA via Europa Press (DPA via Europa Press)

The global economy is moving away from the precipitous decline it was headed for, according to the majority consensus among experts until recently, but it faces a rocky road, fraught with insidious, potentially persistent problems.

Possibly, this is the synthesis of the enormous plurality of qualified points of view expressed in this edition of the World Economic Forum in Davos.

There are many factors that contribute to partially clear the horizon that was so cloudy after the outbreak of the invasion of Ukraine: growth data have exceeded expectations;

inflation rates contract;

labor markets remain strong;

China's reopening promises a new boost to the global economy.

But the Forum has revealed widespread concern about the persistence of problematic factors.

Inflation, although contracting, remains high and hits the underprivileged classes particularly harshly, causing an erosion of purchasing power that hurts and threatens to accentuate inequality that destabilizes world politics.

Everything indicates that the interest rate increases by the main central banks will continue, and with them the effects of cooling the economy and the destabilization of the sovereign debts of developing countries.

“The news has gotten much better in recent weeks.

The prospects for 2023 are not brilliant, but much better than we feared,” Christine Lagarde, president of the European Central Bank, acknowledged on Thursday, alluding to the rate hikes.

"However, inflation is still too high, and it will be necessary to continue to ride in restrictive territory."

The debate about which is the appropriate direction for the interest rate rise is perhaps the central issue.

The difficulty of dealing with inflation generated by a supply

through a monetary restriction that does not resolve this while intervening in demand is a great challenge.

And the data scenario shows enormous complexity, with clear signs of cooling inflation, but worrying data on underlying inflation, on the specific food sector, and a geopolitical scenario that is not reassuring.

“I am concerned about the possible consequences of China's reopening on inflation.

The low Chinese demand has been a factor that has allowed it to be contained,” said Christian Sewing, CEO of Deutsche Bank.

In a similar line, Axel Lehmann, president of Credit Suisse Group, had pronounced: “China reopens.

What happened when the West reopened?

That the reality of growth far exceeded expectations ”, he pointed out, considering that the same could happen with China.

This factor, the awareness that the large drop in the price of gas is largely due to the fortunate circumstance of a very mild climate in Europe, the existence of extensive subsidy programs —70% of which are distributed in the EU in a way that is not focused on those most in need, according to the vice president of the European Commission that brings together the economic area, Valdis Dombrosvkis— and other elements make it doubtful that, if the first stages of the contraction of inflation have been agile, the following ones could be so in the same way.

Other reasons for concern fly over the general perspective.

One is inequality.

A recent World Bank report highlighted how, after three decades of global poverty reduction, the double whammy of the pandemic and the war in Ukraine has reversed the path.

Their data suggest that the income loss of the poorest 40% in the world is double that of the richest 20%.

Another report published by Oxfam International on the eve of the Davos forum maintains that the richest 1% in the world have earned two-thirds of the wealth created since 2020, double that of the remaining 99%.

Gabriela Bucher, director of Oxfam International noted the following: “What we see is an explosion of inequality.

There is a cost of living problem, a hunger problem, and a debt problem that reduces the ability of low- and middle-income countries to invest in their citizens.

The pandemic has widened the gaps in the world.”

The UN Secretary General, Antonio Guterres, underlined precisely the problems linked to world tensions on two axes: the North-South, with the southern countries reproaching the northern ones for their attitude in multiple ways, and the East-West.

In the latter, a protectionist race is detected, especially linked to investments in green technologies, which can also cause problems.

History teaches that protectionist measures often trigger negative spirals that are difficult to stop later.

This takes place in the midst of a complicated operation to reformulate globalization, with Western countries seeking to reduce their dependence on China.

On the other hand, if many fundamental data have had an encouraging development in recent weeks, the picture is not unanimous either.

Contraction data for retail sales in the US in December, together with signs of insistence on the path of interest rate rises, have caused some agitation in the markets this Thursday.

“For me the issue is not a short-term recession, it's the outlook for the next 3-5 years, with multiple factors converging towards slowing, modest growth,” Lehmann said.

But these elements of caution are part of a much clearer framework than was expected in an almost general way recently.

"There are several factors that explain why the outlook will not be as bad as it could have been," said Douglas Peterson, chairman of S&P.

“Labor markets are very strong.

Consumers have accounts in good standing.

The business sector and the financial sector are strong.

There may be a mild recession, but there is a lot of strength around it,” he said.

“The economy has been surprising us quarter after quarter.

It may also surprise us in 2023," said Mario Centeno, governor of the Central Bank of Portugal.

Gita Gopinath, deputy managing director of the Monetary Fund, also expressed optimism, indicating that her institution is preparing to improve forecasts for 2023.

In the energy sector, several signs of resilience are giving rise to optimism, especially in Europe.

Germany, for example, has managed to activate two liquefied natural gas terminals, while the supply diversification process has progressed fairly smoothly.

Meanwhile, apart from the reopening of China, several emerging countries, especially in Southeast Asia, are showing signs of economic strength: India and Indonesia —which together have some 1.7 billion inhabitants and almost five trillion GDP, more than Japan or Germany—plan to grow vigorously in 2023.

The great scare is, then, overcome.

Catastrophic visions have been buried;

but in Davos the economic climate is not perceived calm.

“It's my first time here.

They tell me that there is always a state of mind: sometimes it is excessively positive;

others, excessively negative.

I think this time it seems balanced," summed up Keir Starmer, leader of the British Labor Party.

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