Businesses and policymakers have to question many of the assumptions that have underpinned strategic planning in recent years and decades. One of them is giving more weight to resilience over efficiency. That’s a disruptive process, but it can also be a catalyst for innovation, adaptation and improvement
The latest IMF World Economic Outlook report forecasts a decline in global growth from 3.4% in 2022 to 2.8% in 2023, followed by a recovery to 3.0% in 2024. However, it doesn’t rule out the possibility of further decline. The IMF is certainly not alone in trying to understand the underlying trends in the world economy, which is facing many unknowns in times of gloomy global political and economic developments. Indeed, the latest World Economic Forum Chief Economists Outlook Report 2023 indicates that the experts they surveyed are too divided on the likelihood of a global recession. We turned to Aengus Collins, Head of Economic Growth and Transformation of the World Economic Forum for further explanation of such rift.
“I think the key thing to take from the spread of opinions about the short-term health of the global economy is how uncertain things currently are. There is less confidence than usual about how to interpret and weigh the latest economic developments and policy decisions. This is perhaps clearest at the moment in relation to inflation, where the data continue to confound expectations and where central banks are struggling to bring the pace of price rises back down to target without causing adverse effects elsewhere in the economy. But it also relates to the bigger-picture factors that you mention: it is very difficult to predict the future impacts of global political and economic developments that are unusually volatile at the moment” says our interlocutor. “All in all,” adds Collins, “this is not an easy time to be making decisions that rely on predictions about the future of the economy.”
Do you anticipate any potential alleviation of the negative impact arising from global geoeconomic and geopolitical events throughout 2023?
– There is no doubt that the last few years have been very challenging across much of the world, hitting the most vulnerable hardest. A lot of important work is going on to try to ease or reverse some of the current global disruptions, but if you are asking just about 2023, then unfortunately it looks clear that tension and conflict are going to persist over that timeframe. But there are reasons to be positive about the alleviation of negative impacts. Humans are adaptable, and we can see processes of adjustment and alleviation in things like responses to supply chain disruptions. This highlights a key issue that the disruptions of recent years have brought to the fore: resilience. Resilience is the ability to absorb and even learn from shocks rather than being upended by them. And for organisations and communities of all sorts, I think people are recognising much more clearly the value of investing in resilience, and also the risks that come from underinvesting in resilience.
Another important point here relates to the level of ongoing cooperation and interaction that continues despite the challenging global backdrop. We should not underestimate the amount of global exchange that still takes place every single day: flows of goods, services, people, ideas, technologies, finance and so on. And nor should we underestimate the continuing commitment to global cooperation in responses to truly global challenges like climate change. There is room for cautious optimism.
How likely it is that inflation and disruptions in global supply chains will impact the philosophy of lean manufacturing embraced by companies across the globe?
– This is the question of resilience again, and as I mentioned before, I think people are paying a lot more attention to the importance of resilience than they were a few years ago. The pandemic is probably the single biggest driver of that shift, because of the supply shocks that it triggered, but other global trends are pointing in that direction too.
We are seeing a sharp increase in the prevalence of industrial policies that see governments taking a proactive role in economies, but we have to ask ourselves whether these shifts will stifle competition and exacerbate geopolitical tensions
To give an indication of the kind of changes to expect, in the latest edition of our Chief Economists Outlook, 90% of our survey respondents said they expect businesses’ prioritisation of resilience over efficiency to be one of the drivers of changes to global supply chains in the coming years. Businesses and policymakers are having to question many of the assumptions that have underpinned strategic planning in recent years and decades. That’s a disruptive process, but it can also be a catalyst for innovation, adaptation and improvement.
With almost three-quarters of chief economists expecting the increasing prevalence of industrial policies aimed at enhancing the role of the state in national and global economic development, is it likely that the globalisation we are familiar with is taking a back seat?
– To refer back to what I was saying earlier, I think this is a very good example of an area where there is a lot of uncertainty about what precisely the future is going to look like. Yes, we are seeing a sharp increase in the prevalence of industrial policies that see governments taking a proactive role in economies. But in terms of implications, the devil is in the detail. There are familiar risks that can result from an increased government role. For example, our survey of chief economists highlights the risks that competition will be stifled and geopolitical tensions exacerbated. But some of the most ambitious industrial policy interventions of recent years have been directed towards accelerating investment and innovation related to the climate crisis. If industrial policy can help us reach our global climate goals, that would be an important success. All of this is going to impact the shape or character of globalisation, but I don’t think I would say that globalisation is going to be “taking a back seat”. It will be different, but don’t underestimate the tenacity of processes of global exchange and interaction. Flows of people and goods and ideas and capital will still be central to the global economy.
As noted by the IMF, Social Europe, the Brookings Institute, and many others, this shift is causing instability in regions that were once hubs of mass production, thereby exacerbating the gap between advanced and developing economies. Are we unintentionally sowing the seeds of even more pronounced global disruptions by pursuing the aforementioned industrial policies?
– We maybe need to distinguish between causes and effects here. In some cases, particularly where national security is concerned, industrial policies are being introduced as a response to heightened geopolitical tensions. Those tensions would still be economically disruptive even in the absence of the shift to a new wave of industrial policy that we’re seeing. However, as mentioned above, there is a danger of a feedback loop arising, with some industrial policies exacerbating global tensions which then creates a demand for more assertive policies, and so on. More generally, the shift to more widespread adoption of industrial policies will require careful balancing. Governments are keen to increase growth rates and to incentivize the kinds of investments needed for that, but it will be important to ensure that industrial policy does not come at the price of competition, innovation and resilience. And it will be crucial to strike a balance between protecting domestic interests and fostering global collaboration.
In the latest survey of Chief Economists, a third of respondents said they expect significant changes in the structure of global supply chains over the next three years, with the remaining two-thirds expecting limited changes. From that perspective, how will the new global supply chains map look in 2025 or 2026? How do you see the position of this part of the world in this global reshuffling?
– The twin pressures of deepening geopolitical tensions and intensifying industrial policy mean that further adjustments in supply chains are almost inevitable in the coming years. This reconfiguration is likely to be driven by a mix of diversification and localisation strategies, as well as the greater prioritising of resilience and environmental sustainability. Predicting the structure of the world’s supply chains in a few years’ time is subject to numerous caveats, but the regions highlighted as being most likely to benefit from supply chain changes in our latest Chief Economists Outlook were the U.S., South Asia, East Asia and Pacific, and Latin America and the Caribbean. At the other end of the spectrum, China was seen by the vast majority of our respondents as being most likely to be adversely affected. So, for the moment, Europe is not being seen as among the most affected. But this is perhaps an issue to watch, as one of the drivers of industrial policy in Europe is the desire not to be squeezed out by the evolving policy dynamic between the U.S. and China.
Now that it appears the war in Ukraine is likely to persist for an unknown duration, how probable is it that this conflict will further impact the widening gap in economic outlooks between the U.S., EU, China, and other nations in the foreseeable future?
– The ongoing war in Ukraine is certainly among the numerous factors contributing to exceptional levels of uncertainty around the prospects for the global economy. While the initial strains on food and energy markets have eased, the war and its knock-on effects—such as escalating sanctions—remain a source of disruption. More broadly, the war in Ukraine is also a sobering example of how quickly tensions can turn into kinetic conflict, and I think that is contributing to wider nervousness about the implications of various other global tensions. In economic terms, Europe has proven more resilient than expected to the energy shock triggered by the war, but I don’t think the war is likely to have the key influence over the economic outlooks that you mention, for the U.S., Europe and China in particular. Geopolitical and geoeconomic tensions will certainly play an important role, but so will numerous more positive factors, such as the domestic policy environment, the vibrancy of business innovation ecosystems and how well businesses and policymakers respond to major global trends like energy transition or the ongoing technological disruptions of the Fourth Industrial Revolution.