What we are hearing from around the world isn’t very good in terms of global economic outlook. Every day, there is a new bad news from the financial markets. Be it the conglomerates or smaller businesses, the stock markets or the public sector enterprises; what we are hearing is also giving clear indications that the global economic outlook is bad. We all remember the financial crisis of 2008 which was one of the most severe economic challenge across the world.

The crisis sparked the Great Recession, which, at the time, was the most severe global recession since the Great Depression. It was also followed by the European debt crisis, which began with a deficit in Greece in late 2009, and the 2008–2011 Icelandic financial crisis, which involved the bank failure of all three of the major banks in Iceland and, relative to the size of its economy, was the largest economic collapse suffered by any country in history. It was among the five worst financial crises the world had experienced and led to a loss of more than $2 trillion from the global economy. Resultantly, Bailouts came in the form of trillions of dollars of loans, asset purchases, guarantees, and direct spending.

At present also, the news isn’t very good. While China’s economy is huge; several countries around the world face severe economic challenges. Pakistan’s economy got worse in the region for last two years.

The 2008 Global Financial Crisis

The 2008 financial crisis was caused by a confluence of issues within the finance industry and the broader economy. The financial crisis was primarily caused by deregulation in the financial industry. Howsoever, the world economy was able to recover gradually. It gained its strength back after several years and the independent researchers claim that the economic damages were recovered until the year 2017. Thus, it took over 10 years for the world to recover from the economic shock of 2008.

If we see the current situation, it isn’t much different. For instance, there is an ever increasing inflation with lower growth around the world. It can be denoted to several considerations. Yet, if we consider a few prominent ones. These are the coronavirus pandemic as one of the major challenge along with Russia-Ukraine crisis, rising oil and gas demand, increasing population across the globe and relatively riskier business environments.

The World Economic Outlook of the International Monetary Fund predicts that the January 2023 World Economic Outlook Update projects that global growth will fall to 2.9 percent in 2023 but rise to 3.1 percent in 2024. The 2023 forecast is 0.2 percentage point higher than predicted in the October 2022 World Economic Outlook but below the historical average of 3.8 percent. Rising interest rates and the war in Ukraine continue to weigh on economic activity. China’s recent reopening has paved the way for a faster-than-expected recovery. Global inflation is expected to fall to 6.6 percent in 2023 and 4.3 percent in 2024, still above pre-pandemic levels.

Global Economic Outlook

Similarly, the World Bank’s Global Economic Outlook also shares some key points related to the current crisis situation. The key points include:

• The global economy has slowed to the extent that it is perilously close to falling into recession—defined as a contraction in annual global per capita income—only three years after emerging from the pandemic-induced recession of 2020.
• Very high inflation has triggered unexpectedly rapid and synchronous monetary policy tightening around the world, resulting in worsening global financial conditions.
• Global growth is forecast to slow to 1.7 percent in 2023—the third weakest pace of growth in nearly three decades, overshadowed only by the global recessions caused by the pandemic in 2020 and the global financial crisis in 2009.
• Risks to the outlook are to the downside. Global inflation may not moderate as expected, or may be pushed higher by renewed supply disruptions. Persistently high core inflation may require policy interest rates to be lifted higher and faster than currently expected, which may contribute to widespread financial stress. The risk of policy missteps is elevated.
• Policy makers can take action to help avoid a sharp slowdown stemming from financial instability or excessive monetary tightening in pursuit of inflation objectives.
• The international community needs to intensify its support to those affected by conflict and food insecurity. It can also help reduce the risk of debt crises in the poorest countries through timely debt restructuring.
• Tighter financing conditions, weaker growth, and elevated debt levels create significant fiscal challenges for EMDEs. In responding to food and energy shocks, governments need to avoid inefficient subsidies or export restrictions and instead provide targeted support to vulnerable groups.
• Given the rising human and economic costs of more frequent climate-related disasters, speedy action to foster the energy transition is critical for mitigating climate change.

Global Financial Conditions

There are some indications in the financial system as well. The global financial conditions have tightened sharply, with risk appetite dampened by slowing global growth, persistently elevated inflation, and faster-than-expected monetary tightening. Long-term government bond yields in the United States and Germany increased at their fastest pace in nearly three decades in 2022, reaching their highest levels since 2007 and 2011, respectively, in October. In the United Kingdom, a sharp deterioration in liquidity related to collateral calls on pension fund derivative positions prompted central bank intervention in gilt markets for financial stability purposes. Equity markets worldwide saw substantial declines—by December, the MSCI World equity index had declined nearly 20 percent since the start of the year, with equity market indexes down more than 15 percent in about half of countries.

Moreover, global core inflation has risen markedly, reaching over 6 percent late last year, its highest level since 1992. As a result, short-term inflation expectations have risen in most economies. In contrast, long-term inflation expectations have been relatively more stable, edging up by only about 0.15 percentage point in both advanced economies and EMDEs since the onset of the pandemic. This stability may reflect the credibility of the commitment of most central banks to confront inflation, reinforced by recent policy tightening.

Inflationary pressures started to abate toward the end of 2022, reflecting weakening demand and easing commodity prices. The share of countries where inflation is accelerating is trending down. In the face of substantial monetary tightening, slowing activity, easing supply chain disruptions, and moderating prices for many non-energy commodities, both core and headline inflation are expected to decline over the forecast horizon. In many countries, however, high core inflation has been unexpectedly persistent, suggesting that global inflation will remain elevated for longer than previously envisaged.

Is the global economy going towards a default?

So, is the global economy expecting a default? Although, there are several other claims regarding the overall recession and crisis. Yet, the global economic outlook is positive, with strong growth in the United States and Europe. There are concerns about the potential impact of trade tensions, but overall the global economy is expected to continue to grow in the coming year. It can be certainly stated that the economic conditions change with every new challenge or opportunity. And, therefore, we can expect changing patterns with changing circumstances. Howsoever, the global economy isn’t proceeding for a default in near future.

Is the global economy going towards a default?