In collaboration with the Financial Times (FT), Eswar Prasad of Brookings and Caroline Smiltneks of Cornell have constructed a set of composite indexes that track the global economic recovery. The Tracking Indexes for the Global Economic Recovery (TIGER) is also featured in the Financial Times. A version of this article also appears in Project Syndicate.
The world economy appears calm, with falling inflation and modestly resurgent growth, but beneath the surface there is much turbulence and many simmering anxieties. The latest update of the Brookings-FT Tiger indexes shows that global growth is gaining momentum, but this growth is still weak, disjointed, and driven mainly by the continued strong performance of the U.S. economy. Business and consumer confidence are fragile worldwide, reflecting precarious economic prospects and political uncertainty in many countries, as well as festering geopolitical instability in many hot spots.
One disconnect in the world economy relates to the wide disparities in growth momentum and prospects. The U.S. and Indian economies are in high gear. But most other advanced economies and many emerging market economies, including China, are mired in a slump and remain hamstrung by rising debt burdens and feckless policymaking. Another disconnect is that financial conditions have improved and stock markets have done well even in some countries with weak growth prospects while private sector confidence has tanked across the board. This disconnect could be the consequence of monetary policy becoming looser while deep-rooted reforms continue to be elusive.
A soft landing in the United States is now in clear view, with inflation falling gradually even as domestic demand and the labor market remain robust. Strong increases in employment and wages, and a rising stock market that portends healthy corporate earnings, augur well for sustained growth. The Federal Reserve has room for maneuver and is on course to maintain a gradual, tempered path of interest rate cuts. Strikingly, consumer confidence has deteriorated despite all the positive news, indicating dissatisfaction with the state of the economy and becoming a key issue for the upcoming elections. A rising public debt to GDP ratio, a problem that both political parties’ election platforms will only worsen rather than bring under control, is a growing risk to macroeconomic stability.
The core eurozone economies, especially Germany and France, are in the doldrums while countries in Southern Europe, such as Spain and Greece, have performed better. The German economy is stuck in neutral, bogged down by high energy costs, a creaky industrial infrastructure, stagnant productivity, and rising export competition from China. France faces severe fiscal problems that portend further economic and political instability. Lackluster growth and falling CPI inflation have forced the European Central Bank’s hand in cutting rates, although services inflation and wage growth have stayed persistently high.
Despite declining business investment and poor productivity growth, the U.K. economy seems to have gained some traction, supported by looser monetary policy and despite fiscal problems looming large. In a break with its peers, the Bank of Japan has raised interest rates to prop up the Japanese yen and dampen rising inflation, but this may do little to encourage household consumption.
China’s floundering economy as well as real estate and equity markets have received a boost from monetary and fiscal policy stimulus, in addition to measures to bolster property prices and bank balance sheets. However, these measures are unlikely to be sufficient to overcome deflationary pressures arising from weak domestic demand. Household consumption and private business investment remain tepid, as private sector confidence has taken a beating from the lack of clear policy direction from the government. A combination of additional well-targeted fiscal policy measures—including income support for households, tax cuts, and a restructuring of center-provincial fiscal relations—in tandem with more fundamental reforms to revive productivity growth and restore private business confidence are essential to put the economy back on track.
India’s growth has been impressive, supported by investment in public infrastructure and strong growth in the high-value manufacturing and services sectors. Increased consumer spending and healthy bank balance sheets have offset the headwinds stemming from still-high inflation and weak agricultural sector performance. Monetary and fiscal policy have stayed disciplined, boosting financial markets. India stands to benefit from the decline in global interest rates, which could stimulate more capital inflows, and geopolitical currents that have promoted its integration into global supply chains as an alternative to China.
Indonesia, supported by a strong policy framework that appeals to foreign investors, continues to be a steady performer. Russia’s economy and financial markets have held up well despite Western sanctions resulting from its invasion of Ukraine, although the war will diminish the economy’s long-term growth potential. Brazil and Mexico appear on track to register healthy growth. Many other Latin American economies remain constrained by large budget deficits, unsustainable debt burdens, exchange rate volatility, and the slowdown in China, a major destination for exports from the region.
As inflation recedes and growth stabilizes, policymakers around the world have an opportunity to forcefully tackle deeper-rooted obstacles to growth. Governments need to bring public finances under control while taking steps to rejuvenate household and business confidence. Clear policy frameworks to bolster productivity growth and a down payment in the form of concrete steps to improve the functioning of labor, product, and financial markets are essential to reinvigorate and rebalance growth worldwide.