Two Big Risks in 2024-2025: an Economic Slowdown and Expanding Hegemonic Conflicts
By Dr. Rodrigue Tremblay.
Emeritus professor of economics and international finance,
Université de Montréal.
"When every country turned to protect its own private interest, the world public interest went down the drain, and with it the private interests of all." Charles Kindleberger (1910-2003). American economic historian, (in his book "The World Depression 1929-1939", 1973)
"The world is a dangerous place to live—not because of the people who are evil but because of the people who don't do anything about it." Albert Einstein (1879-1955). (As quoted in the book by Josep Maria Corredor "Conversations avec Pablo Casals", 1955)
"I think it is the beginning of a new Cold War... I think the Russians will gradually react quite adversely and it will affect their policies. I think it is a tragic mistake. There was no reason for this whatsoever. No one was threatening anybody else." George F. Kennan (1904-2005). American diplomat and historian, (in The New York Times, May 2, 1998, about the U.S. expansion of NATO toward Russia.)
“While defending our own vital interests, nuclear powers must avert those confrontations which bring an adversary to a choice of either a humiliating retreat or a nuclear war. To adopt that kind of course in the nuclear age would be evidence only of the bankruptcy of our policy—or of a collective death-wish for the world.“ John F. Kennedy (1917-1963), 35th U.S. President, 1961-1963, (in an important speech on Monday, June 10, 1963)
In 2024, most economies are expected to face economic headwinds. Indeed, that is why in many countries, especially in Europe and in North America, polls indicate that people's main preoccupations are economic topics, such as the lingering inflation, high personal and public debts and the likelihood of a more or less severe economic recession.
An economic-social issue such as the influx of hordes of illegal immigrants will also be a source of concern, especially in Europe and in North America, above all if the rates of unemployment increase.
Similarly, the ongoing bombing wars in Ukraine and in Palestine, as well as the growing tensions between the United States and China and those between the U.S. and Iran, are foreign policy issues that could raise concerns.
Important economies according to their GDP vs. smaller rich economies per capita
According to World Bank data, the gross domestic product (GDP) of the United States, at mid-year 2023, was $25,463 billion. This places the U.S. economy number one with 24.3 percent of the world economy.
The economy of the European Union (EU), a bloc of 27 countries, represents 21.7 percent of global GDP and is the second largest in the world. China's economy follows in third place, with 15.0 percent of global GDP.
However, in terms of living standards (GDP per capita), small economies dominate the list, with Luxembourg ($127,580) in the lead, followed by Norway ($106,328), Ireland ($103,176) and Switzerland ($92,381).
An overview and expectations
The economic cycles of the major economies do not coincide perfectly, and vary somewhat depending on their economic structures and the economic policies followed by their governments.
The central question today is whether or not the coming economic year will be one in which major economies will be able to avoid a full-fledged economic recession.
The exuberance in the stock and bond markets seems to indicate that they are anticipating a gentle economic slowdown, driven by a marked decline in inflation and multiple cuts in interest rates to come.
The alternative situation to consider, contrary to the general optimism, could be that of a year characterized by a classic economic recession, more or less severe, a consequence of economic and financial imbalances accumulated in the past. It could be caused also by unexpected economic, financial and geopolitical shocks to come.
Currently, the general economic consensus is that the fight with higher interest rates that the main central banks are waging against inflation, (which was generated by large public deficits and by excessive monetary creation to counter the harmful economic effects of the 2020-2022 pandemic.), will succeed.
Thus, the central question boils down to whether the coming year will witness a very manageable mild economic slowdown or that many countries could rather have to go through a longer and more severe economic recession, with a minimum of two successive quarters of contracting GDP.
The American economy
Even if the U.S. economy is presently the most resilient of all, being at a virtual full employment level, with an official 3.7 percent unemployment rate, and with a rising consumer confidence, there are nevertheless some cracks appearing.
For example, the Conference Board's leading economic index is still declining and forecasting a mild economic recession in the United States, in 2024. Also, even though U.S. employment still holds steady, job openings are declining. This could be an indication that business investment and production plans in some sectors are being adjusted downwards.
The reason why the U.S. economy is performing better than other economies, besides the contribution of its vibrant technology sector, is partly due to its heavily subsidized arms industry, which is one sector that is prosperous and in constant growth. It comprises more that 200,000 companies, the most prominent being Lockheed Martin, Northrop Grumman, RTX (Raytheon), General Dynamics and Boeing.
Those companies are important contributors to the industrial growth and economic prosperity of states such as Alabama, Connecticut, Virginia, Texas and California.
The European and Canadian economies
It is even possible that future economic data, to be released next March, will confirm that several European countries and Canada are already into a recession, with two quarters in a row of decline in domestic production.
An energy crisis stemming from the Ukrainian-Russian conflict is adding to the rise in interest rates in slowing down European economies, notably those of the 20 countries of the Eurozone. Presently, the German and Italian economies would seem to be the best candidates for a recession.
In Canada, the unemployment rate is still respectable at 5.8 percent. But job growth is anemic, with only100 new jobs created last December.
Additionally, largely due to an open-door immigration policy, the Canadian population is growing at a record rate, by far the most of all industrialized countries, while employment growth stagnates. This is translating into a decline in living standards, as measured by real GDP per capita.
A period of stagflation can also be expected. Indeed, mass immigration, without major investments in infrastructure, increases effective demand but lowers productivity. The economy can find itself with both inflation and an economic slowdown.
The Organization for Economic Co-operation and Development (OECD) has even published a study, in March 2023, in which it highlighted that Canada is lagging behind developed economies in terms of the standard of living of its population, which continues to decline. The standard of living in Canada has been deteriorating since 2014, under the effect of unbridled immigration and poor general productivity growth.
Geopolitical risks
What could turn a mild economic recession into a more serious one would be an expansion of the ruinous and ongoing military conflicts in Ukraine and in the Middle East, or new and wider hegemonic wars to come.
In such a case, as most governments face high debt levels (i.e. total public debts greater than their yearly total domestic product), such developments would be likely to reignite inflation and cause a further surge in interest rates in years to come.
It is rare for economic conditions and geopolitical risks to be linked so closely, but unfortunately, this is the type of world we live in today.
Conclusions
The economic conundrum in 2024 is whether the expected economic slowdown will be mild and not very disruptive to labor and stock markets, or rather, whether unforeseen financial events, such as the failure of a large financial institution, could precipitate a more serious and severe global economic recession.
The geopolitical ball is murkier because the U.S. government of Joe Biden does not seem anxious to end military conflicts, even though the President had initially promised, at the start of his administration, to rely more heavily on diplomacy to resolve international disputes.
Nevertheless, the year 2024 could be an important turning point, both economically and geopolitically.
Dr. Rodrigue Tremblay.
