by Xinhua writers Wang Jiangang, Mao Lei
UNITED NATIONS, May 17 (Xinhua) -- A leading UN economist has highlighted key global macroeconomic developments and emphasized the need for stronger international cooperation to address mounting economic challenges.
In an exclusive interview with Xinhua on Tuesday immediately after the launch of the Mid-year Update to the UN's World Economic Situation and Prospects report, Hamid Rashid, chief of the Global Economic Monitoring Branch at the UN Department of Economic and Social Affairs and lead author of the report, cautioned about the possibility of "slower long-term growth" and indicated that a return to pre-pandemic growth rates remain unlikely both in developed and developing economies.
He warned of a potential prolonged period of "subpar growth," underscoring the importance of understanding this new economic reality.
The interview delved into the intensified fiscal and monetary policy challenges in the current economic scenario. Rashid described the "trilemma" faced by policymakers in developed economies, who strive to stimulate economic growth, tame inflation, and maintain financial stability.
He acknowledged the difficulty of achieving all three goals simultaneously and explained that policymakers in developing countries, such as China and others, "have more fiscal and monetary space to navigate these challenges."
Rashid highlighted the risk faced by the largest economies, as they need to maintain a tight monetary stance and tighten fiscal positions, which limit their options for expansionary measures for stimulating economic growth. This presents "a unique challenge" for policymakers in advanced economies.
Discussing the balance between taming inflation, ensuring financial stability, and fostering economic growth and employment while managing international spillover effects, Rashid acknowledged the complexity of the task.
The economist emphasized that policymakers in advanced economies "face challenging trade-offs," where it may be hard to maintain financial stability while raising interest rates further to tame inflation. Maintaining inflation at the target level will require not only even higher interest rates but also "significant spending cuts," which will dampen economic growth and have long-term implications.
Rashid further explained the international spillover effects of monetary tightening in the United States, which results in capital outflows from the developing countries and depreciation of their currencies. This, in turn, affects developing countries' interest rates, cost of capital and investment, "adding an additional layer of complexity to the global economic challenges."
Shifting the conversation to notable trends and shifts in global economic outlook since the previous report, Rashid highlighted "early signs of financial instability risks," particularly in the U.S. banking sector. While these risks have been sporadic and not yet been widespread, they "expose vulnerabilities" due to rapid interest rate increases, which impact long-term bond prices and the balance sheets of the banks holding U.S. government bonds.
This "poses significant financial stability risks" that require careful attention, he added.
Regarding central banks' response to inflation and monetary policy tightening, Rashid emphasized their focus on maintaining low inflation as the primary goal. However, achieving the 2 percent inflation target set by the U.S. Federal Reserve may "come at a high cost." This includes keeping interest rates high, affecting credit channels and household spending, and potentially leading to lower economic growth. While the possibility of a recession remains uncertain, positive outcomes cannot be ruled out either.
Rashid expressed his key concern for the world economy, highlighting that many developing "countries on the verge of default," struggling to provide fiscal support to economic growth due to high debt burdens.
He stressed the importance of international cooperation and restructuring debt "to provide more fiscal space for developing countries."
Rashid called for common understanding and increased international cooperation, particularly with private creditors, to ensure a more equitable and sustainable solution. This would enable developing countries to have the necessary resources to support economic activities and "mitigate the risk of a significant global economic downturn."
When asked about the projected slowdown in global growth being less severe than previously anticipated, Rashid acknowledged the resilience of household spending and he also cautioned about the ongoing monetary tightening measures. These measures might lead to significant weakening in household spending, resulting in a slight downward adjustment of growth forecasts for 2024.
However, he reassured that the expected recession or slowdown would likely be "shallower and of shorter duration."
Highlighting the positive developments in the global economic situation since the report's launch in January, Rashid emphasized an upward revision in growth forecasts.
Initially projected at 1.9 percent, the global economy is now expected to reach 2.3 percent. This positive adjustment is attributed to "the resilience of household spending" in developed economies like the United States and Europe, which account for a significant portion of economic activity.
Additionally, the recovery and reopening of China's economy have also contributed to the more optimistic growth outlook, Rashid said. ■