LOST ECONOMY

Can the world go bankrupt? Well, this looks unlikely and even fantastic both in practice and in theory, resembling a typical scene from apocalyptic movies. However, the foreign media outlets continue publishing opinions on the world economy experiencing a crisis of the century, citing research by international financial institutions (IFIs) as evidence. The influential Center for Global Development (CGD) is therefore calling on countries to take drastic and wide-ranging policy measures as soon as possible to prevent a global recession, strengthen the macroeconomic framework, improve medium-term growth prospects and tackle climate change.

Recession warning

Obviously, the global economy has experienced a series of destabilising shocks. Consensus forecasts for global growth in 2023 have been significantly downgraded over the past six months. Although they do not point to a crisis, a sharp slowdown in growth increases the likelihood of a global recession if one of the many negative risks materialises. This is the view of almost all leading IFIs.

For example, Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), believes that the global economy will expand at an average annual rate of around 3% over the next five years, the worst medium-term forecast since 1990. Among the factors constraining growth, she noted further economic fragmentation and geopolitical tensions.

The IMF also echoes calls from the Organisation for Economic Co-operation and Development (OECD) and other international institutions for central banks to stay the course in raising interest rates in coming quarters. Fighting inflation is crucial to improving medium-term economic performance, Georgieva said.

IMF forecasts overall inflation at 7.0% this year and a further drop to 4.9% globally in 2024.

"A return to the inflation target is unlikely in most cases before 2025," the IMF statement stated. Most countries expect it to be around 2%.

The World Bank has warned that the coronavirus pandemic and the war between Russia and Ukraine have contributed to reducing the long-term growth potential of the world economy. This could lead to the so-called lost decade, which would mean increased poverty and reduced resources to deal with the effects of climate change.

The WB estimates that global average potential output should fall to a 30-year low of 2.2% between 2023 and 2030. The fall will be more pronounced for developing countries, whose annual growth averaged 6% from 2000 to 2010 - for them the figure could fall to 4% this decade.

International experts warn that the Golden Era of development is coming to an end and politicians need to be more creative in dealing with global issues as there is no longer a magic wand that would ensure a rapid economic growth for countries such as China.

"It will take a titanic collective political effort to restore the growth in the next decade to the average of the previous one," the World Bank report said.

The main reason for this pessimism was that central banks' efforts to curb inflation by raising interest rates caused turmoil in the banking sector, leading to the bankruptcies of Silicon Valley Bank and Signature Bank in the US and the buyout of Credit Suisse by UBS.

"No matter how you look at it, if the current situation worsens and turns into a recession, especially a global recession, it can have negative implications for long-term growth prospects," Ayhan Kose, director of the WB's Outlook Group, said with confidence.

Debts, debts, debts...

If these predictions hold true and no urgent action is taken, the world will be on the brink of financial Armageddon. Unlike the previous global banking crisis in 2008, this time the issue of global sovereign debt is more acute.

According to the IMF, the total global public debt will reach almost 100%(!) of global GDP in 2028. Last year, the level of global public debt was estimated at 92.1% of GDP, indicating a reduction of 3.4 percentage points to the 2021 value.

This year, global government debt will rise to 93.3% of GDP, the IMF believes. However, in 2023-2028 the levels of public debt in the world, with the exception of the US and China, will decrease.

According to figures recently published by the British charity Debt Justice, the poorest nations must pay back their foreign creditors an average of at least 16.3% of fiscal revenues in 2023 and 16.7% in 2024. These are the highest figures since 1998.

Last time the repayments were high, the countries with the highest debt burden were written off 60-80% of their debt, Debt Justice notes. Sri Lanka (78.3%), Laos (57.3%), Dominica (54.6%), Pakistan (43%) and Zambia (38.9%) recorded the highest average level of public debt repayment in 2022-2024.

Who do these countries owe? According to the WB, of the 91 countries scheduled for repayment in 2023-2024, 30% are international organisations, 12% are Chinese private and public sector creditors, 46% are private non-Chinese creditors and 12% are other states.

The situation is interesting: the poorest countries owe China and the US, the very countries whose public debt is growing the most...

On April 10, IMF experts released a special study "How to cope with soaring public debt", in which they recommended that countries pursue fiscal consolidation alongside measures that include structural reforms to stimulate economic growth.

Don't panic!

In contrast to the IFIs, the debtor countries and crisis instigators treat the situation without panic. In particular, John Williams, President of the Federal Reserve Bank (FRB) of New York, made a statement that the collapse of three medium-sized US banks and the ensuing financial strain will not be a "big problem" for the US economy. In the first quarter of this year, US GDP, according to Williams' estimates, grew by more than 2%.

He noted that the Federal Reserve (Fed) still has a long way to go to get the inflation in the US back to its 2% target.

Following the March meeting, which took place a few days after the collapse of three US banks, the Fed raised the benchmark interest rate to 4.75-5%. According to a report of the US Labour Department, consumer prices index (CPI) in the country rose by 5% in March after a rise of 6% in February. Inflation has thus slowed to its lowest since May 2021.

According to US experts, the national economy has proved remarkably resilient, so the risk of a global recession will be avoided.

"The world's leading economies are growing faster than forecast and may avoid a sharp slowdown this year," says a published Brookings-FT Global Economic Recovery Index study. Brookings Institution experts believe that the economies of China, the US, the eurozone, India and the UK are growing faster than expected at the end of 2022, business and consumer confidence are improving. "Chinese GDP is poised to grow strongly this year. With the easing of coronavirus-related restrictions, China's growth rate is likely to reach the target 5%. Rapid growth is also expected in India," argues economist Eswar Prasad.

Amid the easing demand, as well as the reducing supply concerns and impact of temporary factors such as the energy price hikes last year, further acceleration of inflation in major economies is unlikely, says a Brookings Institution report.

Sustainable Azerbaijan

The situation in the global economy certainly has a rebound effect for every country involved. However, amidst negative global expectations, the forecasts for Azerbaijan look more than optimistic. Thus, the IMF World Economic Outlook for April forecasts Azerbaijan's GDP growth for 2023 at 3% (0.5% more than in October forecast), 2024 - 2.6% and 2028 - 2.6%.

The Fund forecasts that the average annual inflation in Azerbaijan will slow down to 11.3% in 2023 (13.8% in 2022), 8% in 2024 and 4% in 2028.

Although more restrained in its calculations, the WB notes in its new report that economic growth in Azerbaijan is likely to be supported by higher investments in the medium term. This includes several energy deals brokered by the European Union, as well as increased public spending on Azerbaijan's Social and Economic Development Strategy 2022-2026. According to WB estimates, in 2023-2025 the average annual growth of the farming sector in Azerbaijan will exceed 3%, industrial production - about 1%, services sector - 4.6%. According to the World Bank, annual average inflation in Azerbaijan will be decreasing and will be 8.5% in 2023, 6.2% in 2024 and 5.4% in 2025.

Fitch Ratings forecasts Azerbaijan's GDP growth to average 2.1% annually in 2023-2024. Fitch expects Azerbaijan's average annual inflation to slow to 10.3% in 2023 and 7.3% in 2024.

The World Bank assumes reduction of Azerbaijan's public debt from 11.7% of GDP in 2022 to 10.9% in 2023. For 2025 this figure is projected at 11%.

As we can see, both important indicators point to a resilient economy. The main thing is that the global storm should not be destructive, and preferably it should pass by.