As we move into 2024, the world economy shifts its fault lines, from price problems such as inflation to politics and debt. Even though inflationary pressures have eased somewhat compared with crises of recent years, new economic challenges are starting to appear, first and foremost driven by political tensions, high levels of debt, and a fragmentation of policy responses.
The global economy is likely to grow anemic 2.4 percent in 2024, narrowly avoiding a major downturn after the high inflation and aggressive interest-rate hikes of 2023. It is the third consecutive year when growth slows. The outlook increasingly clouds political instability, unsustainable debt, and increasing borrowing costs, particularly for economies that are still developing.
The biggest threats to the global economic outlook are the rises in geopolitical tensions. Conflicts in Eastern Europe and parts of the Middle East continue to disrupt critical energy and food supply chains, introducing uncertainty that depresses investment and economic growth. The Ukraine conflict and more recent renewed hostilities in the Middle East have already pushed oil prices up; a complete escalation would send prices to previously unheard-of heights with renewed inflationary pressures. That would slow growth or be a huge blow on a world recession if energy markets were upset.
Debt is another major issue. Several developing countries are now locked into unsustainable levels of debt, worsened by a spiky rise in the global interest rates during the past year. Dealing with such elevated borrowing costs has become extraordinarily difficult for low credit-rated countries, and people would not risk offending their equally wary creditors by assuming more such debt. “Countries with large dollar-denominated debt burdens are particularly vulnerable,” Fitch says. “Multiple debt crises around the world are increasingly possible.”
If, however, global interest rates do not soon ease, many low- and middle-income countries could face severe fiscal challenges, the World Bank warned.
At the same time, political instability is further complicating economic recovery efforts. Economic reforms are coming to a standstill in regions where political gridlock characterizes regions. Political polarization and public dissatisfaction will cut across most developed nations, characterized by stagnant wages and rising living costs. Such politics will invariably push economic policymaking and delay the long-overdue decision-making toward fiscal consolidation and debt management.
In short, even as the global economy seems to be bailing itself out of its worst inflationary battles, new fault lines are opening with political instability and debt crises. The areas policymakers will need to address are head-on, adding in reforms that would strengthen fiscal sustainability and geopolitical stability to avoid stalemate; otherwise, they would avoid the looming specter of a more dramatic economic crisis.
