Overview of the world economy: September 2023
Economies struggle to achieve growth
Among the major economies, it is significant that China is facing a general economic slowdown, leading to a significant loss in consumer and business confidence and a worrying record-increase in youth unemployment to 21% (May 2023). Most notably, and dangerously, there is a growing crisis in its construction industry and the importance of this sector to the Chinese economy is yet to have its full effect. When it does, it will have a detrimental knock-on effect for the rest of the world.
Inflation
Inflation is still considered to be an ongoing concern by major central banks despite significant reductions over the past year with selected current rates (The Economist, September 2023) as follows:
- USA 3.9%
- Britain 6.7%
- Euro Area 5.4%
- Japan 2.9%
- Greece 3.8%
- Spain 3.1%
Apart from Britain, most developed countries have reduced inflation close to their target rates of 2–2.5%. This has been achieved by aggressive monetary policy interventions by central banks through successive interest rate rises together with a weakening of the cost push pressures as supply chain problems have receded and energy prices have declined. Despite this, however, central banks are still willing to increase rates further even though this tight monetary policy risks pushing their economies deeper into recession.
Some economists, at least, are willing to criticise this over-zealous approach. Many major retail traders achieved large increases in their profit over the past year, and this fact is an indication that they passed on cost increases to consumers rather than absorbing them. It is notable that this contribution of large companies to rising retail prices – dubbed ‘greedflation’ – has finally been recognised by the Bank of England, which has traditionally blamed inflation on wage increases. Nevertheless, the UK government has been fighting against public sector pay demands with an anti-inflationary argument as much as affordability.
The economies of Turkey, Argentina, Egypt and Pakistan continue to face problems with soaring inflation and correspondingly high currency depreciations; they have been joined by Russia where the war, sanctions and falling energy revenues have contributed to an unfavourable economic outlook. The Russian currency has depreciated by 37.4% against the dollar over the past year compared with 32.1% for Turkey, 37.7% for Egypt and 59.8% for Argentina. The corresponding inflation figures are:
- Russia 6.5%
- Turkey 46.3%
- Egypt 36.2%
- Argentina 130%
(The Economist, September 2023)
It is worth noting that these are the official figures released by the respective governments and might not be an accurate reflection of the actual inflation rates. Unofficial estimates of Turkey’s inflation, for example, put the actual rate at about double the official rate (The Guardian, July 2022).
Outlook
If central banks continue to pursue a high interest rate policy this sets challenging conditions for world growth, as a general slowdown will generate a downward spiral; this will be made worse if China’s impending economic meltdown becomes a reality. High interest rates are already impacting borrowing costs for mortgage holders in more economically developed countries, promoting a fall in house prices and a recession in the construction sector which is a major contributing source of growth.
If we add to this the ongoing natural disasters related to climate change, the economic outlook for the next year is rather bleak.
Sources in this article (external links):
The Economist, 7 September 2023: Economic data, commodities and markets
The Guardian, 4 July 2022: Turkey hit with soaring prices as inflation nears 80%
