Post-Pandemic World Confronts Gloomy Mix of Debt, Trade Wars, and Low Productivity – Reuters

By Howard Schneider

JACKSON HOLE, Wyoming – Concerns about unprecedented levels of government debt, geopolitical tensions that threaten to disrupt the global trading system, and the likelihood of continued weak productivity growth could lead the world into a slow-growth future, hindering development in various countries even before it truly begins.

This cautious outlook for the post-pandemic global economy emerged from research hosted by the Kansas City Federal Reserve, which was discussed over the weekend. The discussions centered on technological innovation, public debt, and international trade amid rising geopolitical tensions following events such as the Russian invasion of Ukraine and escalating conflicts between the U.S. and China. These dynamics have weakened what was once a broad global consensus aimed at enhancing the free flow of goods and services.

“Countries are now navigating a more fragile landscape. Many have depleted significant fiscal resources to combat the pandemic. Additionally, we face policy-driven challenges such as geoeconomic fragmentation, trade tensions, and the growing division between the West and China,” stated International Monetary Fund chief economist Pierre-Olivier Gourinchas in an interview. “If parts of the world are left behind, coupled with large populations, this will create significant demographic and migration pressures.”

Gourinchas suggested that global growth might stabilize around 3% annually, a figure considerably lower than the over 4% rates experienced during China’s rapid economic growth, which many economists now view as bordering on recession in a world where swift gains should still be achievable in developing nations.

Maurice Obstfeld, a former IMF chief economist and current fellow at the Peterson Institute for International Economics, indicated that the global growth environment has become increasingly challenging in the wake of the pandemic.

China is currently grappling with potentially chronic economic issues alongside a declining population. Meanwhile, emerging industrial policies across the U.S. and other nations are reshaping global production chains in ways that may promote national security but also reduce efficiency.

This symposium marks one of the early significant efforts to assess long-term economic trends following the pandemic amidst renewed geopolitical tensions. Economists and policymakers appeared to agree on two key trends predating the pandemic that have intensified due to recent developments.

Following a substantial rise during the Global Financial Crisis 15 years ago, global public debt as a percentage of economic output has surged from 40% to 60% due to pandemic-related spending. Experts argue that efforts to significantly reduce debt are now politically impractical. The implications vary by country, with higher-debt nations able to navigate challenges better than smaller nations that may face future debt crises.

The ramifications could be severe globally if public borrowing redirects capital from nations with growing populations and underdeveloped economies. “This paints a grim picture for regions that have an abundance of labor but lack capital,” noted Cornell University economics professor Eswar Prasad, highlighting the contrast between aging populations in developed countries and rapid population growth in some African nations.

Moreover, the pre-pandemic trend of increasing openness to protectionist policies has continued. For instance, the U.S. has implemented tariffs and aimed to relocate critical production back home. White House Council of Economic Advisers Chair Jared Bernstein emphasized that current industrial policies are not inherently pro- or anti-trade, as many intermediate goods essential for production still rely on imports.

The conflict in Ukraine and the subsequent disconnect of the European energy grid from Russian resources have shattered a foundational principle of globalization: that trade fosters durable partnerships. “I recall a time when increased trade was expected to build alliances,” remarked Ben Broadbent, deputy governor of the Bank of England.

World Trade Organization Director-General Ngozi Okonjo-Iweala cautioned that while the pandemic has highlighted the need for global supply resilience, a reordering of production could overlook potential growth opportunities. She suggested that diversifying supply sources might be wise, even to nations that have been marginalized in the global system.

Despite the challenges, discussions around advancements in artificial intelligence as a possible catalyst for higher productivity did emerge as a potential bright spot. Nevertheless, concerns persist regarding the possible negative impacts of these technologies, as research indicates that innovation is becoming increasingly difficult.

Finally, any benefits linked to AI advancements may take time to materialize. “I view ChatGPT similarly to Peloton,” remarked Nela Richardson, chief economist for a payroll processing firm. “Just having it in your office doesn’t guarantee it will be utilized.”