A New Year of Economic Risks

When 2023 began, economists and market analysts were warning of imminent recession, stagflation, and possible financial crisis. But the dire forecasts did not come to pass, and the world economy is entering 2024 on a far more hopeful note, with most major economies expected to achieve a much-desired “soft landing.”

But we should not put too much stock in economic forecasts, cautions former chairman of Goldman Sachs Asset Management Jim O’Neill, owing to the “many known unknowns” at play today – especially on the geopolitical front – as well as the “many unknown unknowns lurking on the horizon.” In assessing inflation-related risks, forecasters will need to keep a close eye on factors like monetary growth, inflation expectations, and wage growth.

New York University’s Nouriel Roubini agrees that the “current encouraging consensus could still be derailed by any number of factors, not least geopolitics.” While the worst-case scenarios – including a “severe recession, leading to a credit and debt crisis” – appear relatively unlikely for now, geopolitical shocks, such as “new tensions” between the United States and China, could as a drag on growth.

In fact, the University of Cambridge’s Mohamed A. El-Erian argues, “the chances of robust global growth in 2024 appear tenuous.” Today’s “optimistic sentiment” appears to be driven largely by expectations of “central banks aggressively cutting interest rates amid the softest of all soft landings for the US economy.” But there is good reason to think that central-bank policies alone “may not be enough to generate the necessary growth momentum to withstand the headwinds facing the global economy.”

Harvard’s Kenneth Rogoff thinks that 2024 may well be a “rocky year for everyone.” The likelihood of recession in the US is still “probably around 30%, compared to 15% in normal years,” and “Chinese leaders’ significant efforts to restore 5% annual economic growth face several daunting challenges.” But it is emerging markets that are in the most danger: if “global growth fails to meet expectations,” they could “struggle” to avert a crisis.

The World Bank’s Indermit Gill and M. Ayhan Kose similarly highlight the risks of weak global growth for developing economies. If these countries are to “turn the tide,” they should “focus their policies on generating a broadly beneficial investment boom” and “avoid the kinds of fiscal policies that often derail economic progress and contribute to instability.”

But Harvard’s Dani Rodrik argues that tackling the “four big challenges” the world faces – “the climate transition, the good-jobs problem, an economic-development crisis, and the search for a newer, healthier form of globalization” – will require altogether new approaches. “We must leave behind established modes of thinking and seek creative workable solutions,” he advises, “while recognizing that these efforts will be necessarily uncoordinated and experimental.”