The expression that “it’s a small world” very much fits what came to be known as the global economy. People doing business in one country simply expanded their map to include other parts of the world thus increasing the scope of their reach and profits. For America, it meant expanding the production of its most competitive industries and products, through exports. The end result was that it raised U.S. incomes and shifted production to the most competitive areas of our economy. It was thought to help raise the productivity of the average American worker and through that the income they earn. In short, the global economy was a bonanza for the American economy.
One economist in 2018 compared the global economy to a sunny day without any clouds. For a while it seemed that it described the global economy: a glowing picture as world economies grew and nations shared in the flourishing increased world wealth. Yearly forecasts consistently prophesied increases in the world economy, with the percentage of growth being the only uncertainty. Then came the pandemic and suddenly the world was plunged into an atmosphere of uncertainty and inconsistent forecasts. Accessing goods from another country was no longer automatic. China was no longer the charming country for cheap labor, creativity, and easy shipping.
Despite high levels of government investment, the World Bank predicted that the global economy would in fact decrease by 5.2 percent in 2020. Cities account for 80% of global GDP (Gross Domestic Product), thus they would face the brunt of this decline. Lately, world economists have something new to worry about: inflation. They are debating whether the current high rate of inflation is “transitory” meaning that “it will pass” or is it the forerunner of something worse down the road.
Despite the havoc that the pandemic may have inflicted on world economies, it was also a period of an amazing turnaround in a relatively short period of time as industries that were shut down during Covid-19 reopened. For all practical purposes the pandemic’s ire did appear to be transitory, that is until the Omicron variant seemed to infect the world and industries were forced to shut down again. Shipping became an uncertainty and even a failing process as there was a dearth of labor to load and unload ships. The new normal became the scene at major ports with hundreds of ships waiting to be unloaded.
If that were not enough, supply shortages of critical components like semiconductors hit many industries very hard. The chips are extremely vital to the operation of cars and electronics resulting in shortages that put a deep cringe into the global economy. All this threw the economists for a loop making any short-term predictions untenable. Added to the hard-to-predict trajectory of Covid variants was the fact that the disruptions began to appear as more than just a passing phase.
The economists are also reading the tea leaves of some of the largest economies. In the US, a standoff over raising the federal debt ceiling could bring the nation to the brink of default. In China, the fallout from the property developer Evergrande’s financial problems is raising questions about the country’s debt-and-real estate-fueled growth.
Even the most optimistic economists are now forced to concede that the economic growth of world economies will not measure up to their rosy forecasts. But they are still predicting that the US economy (G.D.P.) will grow by 3.9%, a much faster growth than the US has experienced for most of the 21st century. “We’ve had liftoff, and now we’re at cruising altitude,” said Beth Ann Bovino, chief U.S. economist at S&P Global.
Countries like Israel bucked the downward trend. In fact, multinational business information company Dun & Bradstreet reported that Israel’s economy grew by seven percent in 2021, beating out a global average of 5.9%. growth. On the other hand, the 30% drop in the Turkish lira in November alone has alerted financial markets to the dangers of a crisis in emerging markets. Turkey is an example of how a country’s economy can go South even as the rest of the world appears to be going in the other direction.
After the turmoil of the past two years, the consensus among economic pundits is that 2022 will be calmer. What that means for the global economy is not exactly clear. Does it mean that in the post-pandemic era the global economy will simply return to its overheated state and significant growth, or will it be on “cruise control,” as one economist put it, meaning that while it might not be bullish, it will at least remain the same.
There are many people in our community that benefited greatly from the global economy even to the point where duties on goods were lowered, making them more competitive with imported items. Others benefited greatly by exporting their products outside the United States, frequently with relaxed tax and custom fees.
But in late 2019, when the first reports of a new coronavirus started to filter out from Wuhan in China, few imagined that within months the world economy would go flat by the new pandemic.
The latest issue to preoccupy economists is inflation. Uncontrolled inflation throughout the world and particularly in the large economies will certainly play havoc on the beneficiaries of the global economy. The Bank of England, the US Federal Reserve and the European Central Bank were all caught unawares by a sharp increase in inflation, caused by a combination of rising energy prices, labor shortages and supply-side bottlenecks. The Bank of England expects the annual increase in the cost of living to be above 5% by next April but then start to fall.
There is a more systemic issue that may affect the global economy, which is that many emerging markets have borrowed heavily in US dollars, often using future export earnings as collateral. In the event that the US Federal Reserve tightens policy, the dollar is likely to strengthen, making it more expensive for poorer nations to service their debts. If the global economy also slows, they will face a double whammy. The World Bank and the International Monetary Fund are already warning of increased debt distress. The global economy is a great concept but appears to be a bit shaky these days.