How the global economy learned to love chaos

And yet, for now at least, the global economy is laughing in the face of these fears. At the start of 2023, almost all economists believed that a global recession was imminent that year. Instead, global GDP grew by about 3%. Early signs suggest that progress continues apace this year. Data from Goldman Sachs indicates that global economic activity is about as buoyant as it was in 2019. A weekly measure of GDP produced by the OECD, a club of mostly rich countries, comes in at similar results. And a measure of global activity produced from purchasing managers surveys (called PMI data) indicates stronger growth across the world.

Labor markets are even stronger. The unemployment rate in the OECD area remains well below 5%. The proportion of people of working age actually in employment, the best measure of the strength of the labor market, has reached a record level. Healthy job markets boost family finances, which have been hit by inflation. Real household disposable incomes in G7 countries fell by 4% in 2022, but are increasing again.

It is true that some countries are doing less well. Chinese growth figures continue to disappoint. Some of those coming from Europe are concerning. Germany, facing the consequences of recent high energy prices and competition in its auto industry from Chinese exports of electric vehicles, could be in recession. But there are also stronger results. In January, total nonfarm payroll employment in the United States increased by a staggering 353,000, beating almost all expectations. In Brazil, a country facing several years of weak growth, the latest PMI data are encouraging.

So far, there doesn't seem to be much evidence that attacks on shipping in the Red Sea are capsizing the economy. PMI data suggests that manufacturers are facing longer delivery times. This is consistent with the rerouting of ships around the Cape of Good Hope, which increases the length of the journey between Shanghai and Rotterdam from 18,000 km to 23,000 km. However, in almost every economy, shipping costs represent only a tiny fraction of the overall price of a good. Even the most pessimistic predict a rise in inflation, due to the Red Sea disturbances, which represents little more than a rounding error.

Why is the global economy so oblivious to the new global disorder? High interest rates have managed to bring down inflation from a peak of over 10% in the rich world to around 6%. This not only increases household purchasing power; it also boosts their morale. Indeed, after reaching its historic low in 2022, consumer confidence in the rich world has increased significantly. The rise in borrowing costs has been mitigated by the fact that much household and business debt has fixed interest rates.

There is also a more intriguing possibility: after so many shocking global developments, the world no longer cares as much about chaos as it once did. This is consistent with academic data, including a recent paper by two Federal Reserve researchers, which suggests that the output impact of a spike in economic uncertainty fades after a few months.

Good economists remain vigilant. Higher interest rates could have a delayed impact on growth. The escalation of the war between Russia and Ukraine or in the Red Sea could cause a new round of shocks to energy supplies, thus fueling inflation. All bets are off if Xi Jinping decides to move to Taiwan. On the other hand, lower inflation and the potential increase in productivity through generative artificial intelligence could lead to an acceleration in GDP. Moreover, the global economy has already demonstrated its resilience. Polycrisis, what polycrisis?

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