Despite the bleak outlook in recent years, global economic growth has remained relatively steady. But a series of shocks, including the pandemic, inflation, and the war in Ukraine, have tested the resilience of the United States, Europe, and China in different ways. Most importantly, the United States, which lagged in 2020, is the only country returning to its pre-pandemic growth trajectory.
Capturing the resilience and new growth trajectories of the three blocs requires more than just comparing their growth rates, as each has structural factors. Rather, the changing fortunes are manifested in the bloc's ability, or lack thereof, to return to its pre-pandemic growth trajectory.
Two questions are important today. Have recent conflagrations pushed the blocks off their old paths? If so, can they get back on track? The answer is that he has shown the true resilience of the three blocks and could chart their path going forward.
America pushed itself to the forefront
Not once, but twice, the U.S. economy has undergone the most profound reversal of fortune, reverting back to its pre-pandemic growth trajectory. It may even outgrow its old tendencies.
After the initial severe shock, the US managed to get back on track with its old trends thanks to extraordinary stimulus. However, due to inflation and the associated rapid rise in interest rates, output has once again deviated from the trend path. Ignoring the skeptics, the economy made a strong soft landing, putting the U.S. back on track with pre-pandemic trends. This is truly remarkable evidence of resilience.
There are at least three reasons why U.S. resilience resembles a flywheel rather than a finite, depletable resource. First, strong diversification meant that the overshoot in goods faded in early 2021, while the continued recovery in services offset the drag. Second, the strength of the labor market was protected by significant pent-up demand for workers. Third, despite falling real incomes, household balance sheets have historically been strong, giving Americans room to spend.
These strong sources of resilience were sufficient to withstand the effects of inflation on incomes and budgets, as well as rapid tightening by monetary policymakers. There is little reason to assume that such resilience will suddenly cease.
And you might do even better than that. In the short term, a pick-up in real income growth will boost the economy. And in the long run, a tighter durable labor market is likely to trigger higher productivity growth, as companies are forced to rely on technology to fill labor shortages. This makes it very easy for old trends to go too far.
Tough challenges break eurozone momentum
There was a less favorable reversal of fortune in the euro area. The Ukraine war had a particularly negative impact on Ukraine. The eurozone also proved resilient, avoiding recession in the nearly two years since the start of the war, but its growth momentum has broken and the eurozone is now moving away from its pre-pandemic course.
Although the euro area's recovery was driven by less significant stimulus than the US, it appeared to be on track for a full recovery until the beginning of the Ukraine war. A convincing show of resilience avoided recession, but the shock hit hard and made a trend recovery unlikely.
The euro area was placed at a disadvantage for the challenges of 2022 and 2023 due to its greater exposure to goods production, Russian energy and exports. Rapid adjustments and responses to energy shocks demonstrated resilience, and initial fears of a deep recession and long-term stagnation in production proved wrong. However, growth has stalled due to significant pressure on household budgets.
Unlike pandemic-related shocks, energy shocks are likely to reduce the euro area's growth potential by leaving longer-term effects on real incomes and straining marginal competitiveness. Even if growth returns in 2024, this makes a full recovery to previous trends unlikely. It left an indelible mark on the eurozone economy, but the United States avoided that fate.
China's reversal of fortune
China's path is another astonishing reversal of fortune. The initial recovery was the envy of the world, but now the economy is moving away from its pre-pandemic trends and recovery looks difficult.
Although China's zero-corona approach led to a picture-perfect trend recovery, it ultimately required new lockdowns that weighed on economic growth. At the same time, China's economic model is shifting from investment to consumption. Breaking away from the zero-coronavirus policy was expected to trigger a wave of revenge consumption and bring China's economy back on trend. Confidence in this rise was so strong that many thought a resurgence of Chinese consumers would further accelerate global inflation in 2023.
But Chinese consumers lacked the confidence and purchasing power. The expected economic boom did not materialize due to weakness in other areas of the economy, particularly real estate.
Will China be able to return to previous trends? Successful changes in growth models have been key to China's impressive growth record over the past three decades. Before the 2008 global financial crisis, exports were the engine of growth. As Western demand collapsed, China found more reliable sources of demand in infrastructure and real estate. A building boom further fueled her decade of impressive growth, but the momentum ran out. The third shift to replace investment with consumption as the engine of growth is well underway, but recent history shows that immediate rewards will be difficult to reap. It also reminds us that consumption-driven growth cannot be managed as tightly as investment.
China's slowdown should be seen as a sign of overall success, although the trend now looks even more difficult to reverse. As economies become richer, their ability to sustain high growth inevitably declines. With labor force growth slowing and capital already significantly accumulated, continued progress depends on the most difficult source of growth: productivity gains.
Four years have passed since the outbreak of the new coronavirus infection, and each of the three blocks seems to have settled into a new growth trajectory. Still, new disruptions will occur, and therein lies the challenge for those who need to assess macroeconomic risks. Unpredictability emphasizes agility and quick execution when new surprises arise. There's no master plan, no lasting winners, and quite a few misinformation along the way. Despite its volatility, the global race for growth is not an inexplicable mystery, but a continuous evolution that requires constant judgment.
Philip Carlson Schlezak is a managing director and partner in BCG's New York office and the firm's global chief economist.. Paul Swartz is Director and Senior Economist at the BCG Henderson Institute in New York.They are the authors of the upcoming book Shocks, crises and misinformation: How to assess true macroeconomic risks (HBR Press, 2024)
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