Tuesday, April 16, 2024 | 14:55 WIB

Navigating an unfriendly global economy

Jakarta, IO – Numerous publications from respected international institutions report that Germany, as one of the main drivers of both European and global economies, is struggling to revive its economy. As a matter of fact, the German economy will be in a technical recession In early 2024. Fortunately, private consumption offers a glimpse of hope, allied with strong wage growth and a significant decline in the rate of inflation. 

As the world’s third-largest economy in terms of GDP valuation, a significant impediment to Germany’s economic recovery will impede global GDP growth to around 3.1 percent in 2024, only a slight change from the previous 3.0 percent reported in 2023. 

The International Monetary Fund’s (IMF) January 2024 edition reports that the German economy was projected to contract in 2023, with a negative growth rate of minus 0.3 percent, rebounding to +0.5 percent this year, and continuing to recover more vibrantly, to 1.6 percent in 2025. This significant increase is supported by strong private consumption, once energy prices stabilize. 

Germany’s GDP recovery is followed by a stabilized inflation rate of 2.5 percent in 2024, approaching its target of 2.0 percent, after hovering around 5.9 percent in 2023. This decline in inflation encourages the German central bank to maintain a loose policy stance. 

Fragmented recovery 

IMF data shows economic recovery in the European Union is projected to rise from an estimated 0.5 percent in 2023 to 0.9 percent in 2024, continuing to improve further to 1.7 percent in 2025. The three major EU member countries—France, Italy, and Spain— are expected to grow positively, by around 1.0 percent in 2024 and 1.5 percent in 2025. 

The UK economy, integrated with the economy of Europe but not a member of the European Union following its “Brexit”, has suffered significantly. It is expected to expand by just 0.5 percent in 2023 before recovering slightly in 2024 and 2025, at 0.6 and 1.6 percent, respectively. The UK government has implemented several policies to expedite recovery. 

Therefore, Europe and the US are working towards keeping the inflation rate at 2 percent, as targeted by central banks, allowing the US Federal Reserve (the Fed) and the European Central Bank (ECB) to initiate steps to cut the interest rate. 

The Fed’s monetary policy stances have not shifted much, considering that global inflation is expected to climb as a result of tension in the Red Sea zone, a factor which could potentially escalate global oil prices. 

The Fed’s tight policy still has not succeeded in easing US economic concerns, particularly manufacturing and services sectors, as businesses have become accustomed to elevated interest rates (the Fed’s fund rate is currently within a range of 5.25—5.50 percent). The fact is that the US economy has managed to avoid a recession, as with an inflation rate of 3.4 percent, it could still grow by 3.15 percent in 2023. 

The US economy is expected to grow moderately at 2.1 and 1.7 percent in 2024 and 2025, indicating a normalized US economy as before the pandemic. The Fed’s interest rates are predicted to decline in the second half of 2024 to 5.00–5.25 percent and continue to go down to 4.75–5.00 percent toward the end of this year. This estimate has taken The Fed’s cautious stance into account in responding to escalating geopolitical risks in the Middle East. 

Ryan Kiryanto
Ryan Kiryanto, Economist and Co-Founder, Advisory Board Member of the Institute of Social, Economic, and Digital (ISED)

Interestingly, 2024 and 2025 global economic growth will continue to rely on the Asian region’s developing countries. In 2023, this Asian region was estimated to grow by 5.4 percent, and then for 2024 and 2025, it is predicted to decelerate slightly, to 5.2 and 4.8 percent, respectively, demonstrating a normalized phase following the pandemic. 

Unfortunately, the Asian region’s positive economic trends are disrupted by the uncertain prospects of China’s economic recovery. As a result, the slow recovery of China’s economy is putting pressure on global economic growth, due to the lack of strong internal growth drivers related to real estate (property) issues and an unsettled consumer society. 

As the world’s second-largest economy, global attention now focuses on China, and its projected recovery, with estimated economic growth of 5.2 percent in 2023, predicted to decline to 4.6 percent in 2024 and further down to 4.1 percent in 2025: China needs more time to revive its economy. 

Numerous policies—monetary and fiscal—have been issued to stimulate and expedite economic recovery in the “Middle Kingdom”, as the Chinese economy was badly impacted by their totalitarian lockdown policies in 2020–2022. 

It is only fair for China’s economy to require more time to recover. China no longer dominates global exports; Vietnam has been able to compete, producing goods as appealing as China’s. 

Geopolitical risks 

In general, the world is bracing itself for a potential disruption in global economic improvement and global inflation decline as a result of increasing geopolitical risks: escalating conflicts in Ukraine, Gaza, and the Red Sea; tensions in the South China Sea; and presidential and governmental elections in the US, France, India and Indonesia. 

Rising geopolitical risks have direct and indirect impacts on global transportation modes, whether within the same region, between regions or across continents. Global oil transportation prices, for instance, are projected to rise dramatically as a result of oil tanker route diversions, avoiding the Red Sea and Suez Canal, and instead having to circumnavigate the African continent. 

As a result, global oil prices could potentially surge, to between US$85 and US$95 per barrel, exerting further inflationary pressure on oil-importing countries such as Indonesia. The rise in global oil prices potentially escalates the inflation rate, tempting central banks to delay efforts to lower benchmark interest rates as their first and most rational alternative. In contrast, should inflation reverse and rise, central banks may boost benchmark interest rates, as a second, sensible choice.

If inflation continues to rise, followed by global benchmark interest rates, the global economy will undoubtedly suffer. According to some analysts, industrialized countries may potentially go into recession in the second half of this year. A worst-case scenario would be if geopolitical risks spill over into a surge of inflation and benchmark interest rates. 

The war of words between conflicting countries and groups in the Middle East was exacerbated by failed or stagnant ceasefire agreements, leaving genuine reconciliation in the region increasingly unlikely. As a result, the global economy is currently in a poor state, and must continue to be closely monitored by policymakers and economic actors. 

The increasing geopolitical tensions in the Middle East are beginning to impair global supply chains. Following Houthi rebel attacks on ships sailing through the Red Sea while heading to the Suez Canal and major global economies, major shipping companies have warned of significant delivery delays. 

Satellite images show nearly no ships traveling to Europe, the United States, or the United Kingdom, with most avoiding the Red Sea and altering routes to circle around South Africa. The Panama Canal also suffered recent disruptions, due to climate change-related drought and El Niño rainfall patterns, resulting in a drop in water levels. 

This reminds us of a time when global supply chains were disrupted by the so-called “COVID-19 pandemic”, which spiked inflation and ultimately forced global central banks to raise their benchmark interest rates. It was a scenario contrasting with the outbreak of conflicts in the Middle East. 

If such conflicts start to adversely affect commodity supplies, particularly resulting in a surge in energy costs, global inflation will escalate faster. We can forecast the situation based on the assumption that, in addition to trade frictions, the escalation of tensions in this region will leads to oil prices rising to a range of US$100 to US$120 per barrel. 

Driving the global economy towards stagflation with high energy costs fans the fires of inflation, with the risk of secondary effects in a tight labor market. This situation may burden growth and force central banks to raise benchmark interest rates, adopting a “higher for longer” approach. 

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To date, global oil prices have been behaving themselves, with Brent crude oil remaining reasonably stable at around US$80 per barrel. At the very least, changes in oil shipping routes may increase transportation costs and impact price increases and inflation, delaying any acceleration in global economic recovery. 

The above analysis provides an overview of potential 2024 global economic recovery, despite the inflationary and increasing geopolitical risks in the Middle East (the Gaza Strip and the Red Sea region). 

According to the IMF, the revival of European and US countries’ economies, coupled with a stable Asian region economy (around 5.2 percent for 2024), driven by India and Indonesia (respectively growing at 5.0 and 6.5 percent for 2024), displays optimism for 3.1 percent global economic growth in 2024, which will then serve as a foundation for a further 3.2 percent growth by 2025.