April 2024 update to TIGER: A feeble recovery characterized by multiple divergences

The global economic recovery is being weighed down by geopolitical conflicts, protectionist policies, and persistent inflation. The latest update of the Brookings-FT Tiger indexes shows that global growth has flatlined, although there are glimmers of a positive turn in some countries’ economic fortunes in the year ahead.

The world economy is currently characterized by multiple divergences, starting with divergent growth trajectories of the major economies. The U.S. and India have maintained strong growth momentum while China’s economy is slowing down. Such contrasts are apparent even within the eurozone, where Germany continues flirting with recession while Italy and Spain have performed better. The second divergence is that between real economic performance and financial markets, with equity markets surging even in some countries whose economic performance remains sub-par and where monetary policy remains tight. The third is improving household and business confidence in many countries despite heightened uncertainty engendered by geopolitical stresses and unsettled domestic politics in countries facing elections.

Indexes constructed by Eswar Prasad and Caroline Smiltneks (Cornell), The Brookings Institution, April 2024

Equity market performance and improving confidence are positive omens for at least a modest pickup in global growth relative to 2023, especially if inflationary pressures continue to ease, giving central banks room to lower interest rates. The main risks to this benign scenario are a flare-up of geopolitical tensions, domestic political turmoil in key countries, and inflation that proves difficult to quell. China’s and Germany’s reliance on external demand rather than stimulative domestic policies to bolster their economies could cause rising tensions with trading partners and put a damper on global growth.

The U.S. economy has proven remarkably resilient, with a red-hot labor market and rising equity prices feeding into strong business and consumer confidence, in turn boosting domestic demand. Productivity gains and immigration have bolstered growth, despite the Federal Reserve keeping interest rates high and without pushing up inflation. The Fed has the luxury of waiting to ease monetary policy but is also constrained by sticky inflation dynamics, making it harder to pick the right moment for a policy pivot.

Japan has finally begun to normalize monetary policy and, with its financial markets doing well and confidence returning, looks set for another year of positive but low growth. Persistent inflation, lack of room for fiscal maneuver, and troubled domestic politics continue to limit growth in the United Kingdom and raise the risks of a longer if shallow recession.

China’s economy continues to flounder, although there are encouraging signs that the monetary and fiscal stimulus measures the government introduced over the past year are beginning to stabilize growth. The government’s actions to prop up reeling property and stock markets, in addition to the macroeconomic stimulus, are still hampered in their effectiveness by the absence of a broader framework of reforms that can revive private sector confidence and jump-start the economy. A stronger policy package, including additional fiscal stimulus, would be useful in addressing anemic household demand and deflationary pressures as well as helping turn around weak domestic and foreign investor sentiment.

India is likely to turn in another year of strong performance, with a booming stock market reflective of sunny sentiments among domestic households and businesses as well as foreign investors. Inflation is receding and the government has maintained fiscal discipline overall. The picture is not all rosy, however, as augured by weakness in private investment, employment, and foreign direct investment. Improvements in public governance, domestic infrastructure, and the education system are among the major reform priorities to lock in growth.

Indonesia, which, like India, is on the cusp of a demographic dividend from a young population is another standout performer. The Russian economy has proven surprisingly durable, although its ability to weather sanctions should not be overestimated; the war effort has given the economy an artificial boost that will not necessarily last or translate into a productive economy. Argentina and Mexico are likely to register growth in the 2-3% range in 2024, and Brazil a shade under that, but each of them faces domestic political complications that could restrain domestic demand and cause foreign investors to pull back. The prospect of falling policy interest rates in the United States and other advanced economies has eased the pressure on low-income countries in debt distress, leading to better but still fragile growth prospects.

A relatively benign overlay of a modest uptick in global growth masks enormous problems festering below the surface, including geopolitical rifts, political instability in many countries, trade protectionism, disruptions caused by climate change, and inadequate protection for vulnerable populations and countries. The detrimental effects of economic nationalism and trade protectionism, especially restricted access to global trade and finance, are likely to be felt most acutely by smaller and less developed countries.

A key challenge for policymakers, especially in the major economies, is to put in place policy frameworks that can at least tamp down policy uncertainty, while taking positive measures to boost business and consumer confidence. Central banks will have to remain focused on finishing their battles against inflation, leaving fiscal policies and supply-side reforms to carry the burden.