Although no recession, global economic slowdown persists

Recent data released by the U.S. Department of Commerce show that the economy grew more than expected and that recession forecasts were not met. However, the International Monetary Fund (IMF), in its July 2023 World Economic Outlook Update, warned of a slowdown in the global economy.

The IMF estimates that global growth, which reached 3.5% in 2022, will slow to a modest 3.0% by 2023 and 2024. This forecast highlights the vulnerability of the global economy at present.

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In terms of regional projections, Latin America and the Caribbean are expected to experience a sharp economic slowdown, with growth halving from 3.9% in 2022 to just 1.9% in 2023 and 2.0% in 2024.

For its part, the OECD forecasts moderate growth of 1.5% in 2023 and 1.8% in 2024 for Colombia, lower than the global and regional forecasts.

The role of interest rates in the global economic slowdown

One of the main causes of this slowdown in the economy is the increase in monetary policy interest rates by several central banks to combat inflation.

Although these measures were implemented with the objective of stabilizing inflation, they have had a negative impact on economic activity, especially in emerging countries such as Colombia, by affecting access to credit and reducing the supply of loans.

In the case of Colombia, the Banco de la República decided unanimously, at its July 31, 2023 meeting, to maintain the monetary policy rate at 13.25%, 77% higher than the same month in 2022.

For its part, the U.S. Federal Reserve (FED) has raised the interest rate to its highest level in 22 years, aggravating financial difficulties in different economies. High interest rates have filtered through to the financial system, affecting household purchasing power and reducing the supply of credit in advanced economies.

Some factors have mitigated the immediate risks of disruption in the financial sector

Recent agreements, such as the increase in the U.S. debt ceiling and measures taken to contain banking turbulence in both the U.S. and Switzerland, have provided some relief. However, the outlook for global growth remains tilted to the downside, and inflation remains high, threatening further adverse consequences.

The IMF expects that there will still be savings surpluses to allow domestic demands some degree of resilience, such as that seen during the first quarter of 2023. However, weaker economies, where the savings rate is low, may not experience this dynamic.

In Colombia, the level of indebtedness is at worrying levels. In April 2023 it represented 55.3% of GDP, according to Banco de la República. For his part, the Director of National Planning said that he expects debt service to increase 33% between 2023 and 2024, while investment barely grows 2.3%, dynamics that he describes as “perverse”.

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Inflation remains a major problem

IMF estimates show that global headline inflation will decline, from an average of 8.7% in 2022 to 6.8% in 2023 and 5.2% in 2024. However, this would still leave it above pre-pandemic (2017-19) levels of around 3.5%.

Persistent price increases are eroding the purchasing power of the population and representing a barrier to achieving sustainable economic stability. Banks continue to focus on restoring price stability and strengthening financial supervision to mitigate risks.

In Colombia, inflation has risen steadily since 2021. In July of that year, annual consumer inflation was 3.63%. One year later, in July 2022, inflation had risen to 9.67% annually. Finally, in July 2023 it reached 12.13%, well above the 3% target, according to data published by Banco de la República.

International trade has also been affected by the economic slowdown

Gross fixed capital formation and industrial production have declined sharply in advanced economies, which has impacted trade and manufacturing in emerging markets. The IMF projects that global trade growth will decline significantly, from 5.2% in 2022 to only 2.0% in 2023.

In Colombia, the most recent data indicate a 2.8% drop in exports in May 2023, compared to the same month in 2022. Meanwhile, imports contracted by 20.4% in the same period.

This contraction in world trade -which, as we have seen, has had a direct impact on Colombia- is partly due to the slowdown in exports from China, a country that is positioned as the main trading partner of several economies. Indeed, in May 2023, China’s foreign sales were down 7.5% compared to the previous year.

Rising geopolitical tensions between the U.S. and China

The current transition of the world economy towards a more marked multipolarity, amid the war in Ukraine and other geopolitical tensions, could intensify. Increasing restrictions on trade, international movements of capital, technology and workers present challenges for the global economy.

Such is the case with China’s recent announcements of restrictions on gallium and germanium (you can read about it at this link).

The world is in a slowdown phase of the global economy, with multiple factors contributing to this situation. Geopolitical uncertainty and changes in monetary policies have created instability that hinders economic recovery. It is clear that, although there is no longer talk of resection, challenges persist at the global level.

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