The global economy will grow slightly faster in 2023 than hoped at the beginning of the year. This recovery process is likely to continue in 2024. However, there are also several uncertainty factors, particularly high interest rates, the threat of energy price increases and geopolitical tensions. The uncertainties associated with these factors put a damper on companies’ investment activities – and, therefore, also on economic development.

Here is a look back at three factors that shaped the global economy in 2023 and two factors that will influence it in 2024.

#1 – Stable energy supply supports growth and employment

The most serious economic risk to the global economy in winter 2022/23 was the fear of a supply crisis in the area of energy—especially natural gas—and other raw materials.

This fear was particularly strong in Europe because many European economies are dependent on imports of raw materials. Without these materials, which are at the very beginning of economic production processes, there is a risk of production slumps and declines in employment.

The feared supply bottlenecks did not arise in Europe. There are several reasons for this: efficient use of raw materials, energy imports from new supplier countries and, finally, a mild winter that kept demand for heating energy low.

As a result, economic growth in most of the major industrialised nations is now expected to be higher in 2023 than was predicted a year ago.

#2 – High energy prices and high interest rates dampen economic recovery

Even though energy and commodity prices fell in the course of 2023, they are still significantly above the level of the last 15 years. It can be assumed that they will remain above the pre-crisis level (i.e., energy prices before the coronavirus pandemic and the Russian attack on Ukraine) in the coming years.

Inflationary pressure, therefore, remains high. Of course, monthly inflation rates have fallen as energy and commodity prices have declined. Nevertheless, inflation rates in most developed economies are not likely to drop to the two per cent target set by many central banks until 2025.

High energy prices, in combination with high-interest rates, are dampening economic development – in terms of production and employment – in at least 3 ways.

  1. High interest rates make it more difficult for companies to realise investments. As a result, demand for capital goods – i.e., machinery, tools and buildings – is falling. For the companies that manufacture these goods, this means reduced production.
  2. When interest rates are high, demand for credit-financed consumer goods purchases also falls. This results in a reduction in production and employment in the consumer goods industry.
  3. Rising energy prices reduce the purchasing power of disposable income. Hence, demand for consumer goods declines.

#3 – Energy exporters gained, industrial production weakened

The global economic recovery in 2023 differed from region to region. Countries that live primarily from the export of raw materials are benefiting from rising energy and commodity prices. Their income is growing.

Countries that must import natural gas, oil and other raw materials are suffering from high commodity prices. Production costs of their domestic companies are rising, which has a negative impact on the international competitiveness of these companies.

The growth-dampening effect is particularly strong in countries that are characterised by a high proportion of industrial production in the overall economy. As industrial products are generally more energy-intensive than, for example, services, above-average declines in production – compared to a situation with lower commodity prices – are to be expected here.

This is particularly evident when looking at Germany: according to the International Monetary Fund’s (IMF) estimates from October 2023, Germany is the only major industrialised nation (G7) for which a decline in real gross domestic product (GDP) is forecast in 2023.

Two factors to watch in 2024

Falling energy and commodity prices are reducing inflationary pressure worldwide. This is already helping industrialized economies to recover. Another stabilising factor for the global economy is the easing of the production and supply chain disruptions that led to economic downturns during the coronavirus pandemic.

However, there are still considerable burdens on global economic development. Two factors play a particular role here: the persistently high interest rates and geopolitical tensions.

#1 – High debt limits room for manoeuvre

In the developed economies, inflationary pressure is easing due to falling commodity prices. Central banks will, therefore, most likely ease their monetary policy somewhat in 2024. Nevertheless, key interest rates will remain at an above-average level for the foreseeable future.

This will not only have a negative impact on the investment activities described above, but high interest rates also lead to rising interest payments for companies and governments. This restricts their scope for , e. g. the possibilities of implementing climate-friendly public investments or financing measures to stabilize the economy in the event of a renewed economic downturn.

The high level of government debt in many countries is particularly troublesome. When governments replace expiring loans with new ones, they must pay higher interest rates. If this additional expenditure is not compensated for by tax increases or spending cuts, debt continues to rise.

Four southern European countries (Greece, Italy, Spain, Portugal) and France have above-average levels of debt – i.e., government debt in relation to GDP.

#2 – Geopolitical tensions weaken international trade

Geopolitical tensions are another global economic development with a negative impact on growth and employment. After the global economic crisis of 2008/9, numerous countries took protectionist measures that dampened the growth of global trade.

In addition, more and more countries are now using their economic power to increase their geopolitical influence. The result: trade-restrictive measures – i.e. punitive tariffs, export bans, economic sanctions, etc. – are increasingly being used.

The associated restrictions on cross-border trade are affecting export-oriented economies, including many European countries. Large economies such as the U.S. are less dependent on foreign trade relations due to the size of their domestic market. Therefore, they suffer less from a slower pace of global exports.

The two factors mentioned above are dampening economic recovery in the euro area. In a phase of economic weakness, governments often support economic growth with credit-financed stimulus packages. Given the high public debt incurred during the coronavirus pandemic and the war in Ukraine, the government’s ability to stabilise the economy is diminishing. Europe can therefore hardly hope for government stimulus to strengthen the economy – especially not in those particularly heavily indebted countries.

In October and November, key international institutions published their economic forecasts. The growth forecasts for selected economies are shown in the following figure. The data is taken from the International Monetary Fund’s “World Economic Outlook” of October 2023, the EU Commission’s “Autumn 2023 Economic Forecast” of November 2023 and the “OECD Economic Outlook” of November 2023.

Real GDP growth in the euro area is expected to be around one per cent in 2024 in total. Countries with a high proportion of industrial production – above all, Germany – must expect somewhat lower growth due to the interrelationships outlined above.

In the U.S., economic growth is somewhat stronger. This is partly because the U.S. itself produces large quantities of energy and is, therefore, less affected by high energy prices than European economies.

(Geo)political uncertainties as major unknowns

The predicted economic growth will only occur in 2024 if there are no additional growth-dampening effects. If, for example, new global supply bottlenecks occur, this will lead to interruptions in production.

(Geo)political uncertainties pose an additional economic risk. An escalation of existing conflicts (above all, The War in Ukraine and the conflict in the Gaza Strip) could lead to significant supply chain problems and rising commodity prices. If political parties that focus on economic isolation prevail in the upcoming elections in Europe (above all the elections to the European Parliament, but also in individual countries) and the U.S., this would have a negative impact on global trade – with negative consequences for all export-oriented economies.

While the biggest economic risk in 2023 was energy security, in 2024, it will be political and geopolitical uncertainties. Uncertainty is poison for investment, and declining investment not only weakens growth and employment in the short term but also in the long term, because low investment weakens overall economic production capacities permanently.

This means that 2024 will be another year of considerable economic uncertainty.

About the author

Thieß Petersen is Senior Advisor at the Bertelsmann Stiftung, specializing in macro-economic studies and economics. His focus lies on the causes and effects of financial and economic crises as well as the chances and risks of globalization. Among others, he has recently worked on the effects of carbon pricing and the benefits of a potential global climate club.

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