Headwinds that Continue to Threaten World Economy

As we enter the second quarter of 21st century after witnessing a series of unprecedented crises starting with dot com bubble, global financial crisis, high inflation, crypto currency challenges, Covid-19, Ukraine war, Gaza conflict and re-elect of Trump, world economy continues to face the most persistent challenge of experiencing low economic growth. Developed economies are expected to grow less than 3% in coming years (World Bank), increasing the risk of hunger and poverty globally and large economies like Brazil, Argentina and South Africa will face sluggish growth.

Though world’s total GDP rose to $US110.6 trillion (IMF), yet economic progress seems to have been skewed. Worse, world economy faces powerful headwinds that can further reduce growth, stifle innovation and create social and political instability. Governments, policy makers, trade and industry need to rethink and readjust their policy prescriptions and models in the event of significant policy shifts. Investors need to be more alert for allocating their investments in an era defined by uncertainty and uneven growth.

Prominent headwinds that are expected to impede global growth are geopolitical threats, technological disruption and rise of AI, rising inequality, natural resource scarcities, governmental debts.

Geopolitical Threats

First, geopolitical tension persisting for almost last seven years starting with USA-China trade war, Russia Ukraine crisis and currently compounded by Iran, North Korea and Gaza conflict is proving to be a huge drag on global growth. As the chasm widens between developed and developing countries, BRICs as a powerful emerging economies’ bloc is expanding making it nine at the end of 2024 from 5 in the beginning of 2024. The expanded BRICS bloc – led by Brazil, Russia, India, China, and South Africa – is the most significant of these alliances, representing more than 40% of the world’s population and 36% of global GDP.

Meanwhile countries like Vietnam, Saudi Arabia, Turkey, Mexico and Gulf Cooperation Council are reshaping the global trade routes, reconfiguring the global supply chain and re-altering the price and distribution of essential commodities and critical minerals. This geopolitical rift is also causing delay and hindrance required for timely transition to green energy.

So, the first quarter of 21st century has been less successful in terms of economic growth as compared to last quarter of 20th century when neoliberalism flourishing under the influence of Washington consensus allowed world economy to notice better economic growth and rise of living standards.

Tech Disruption & AI

While the role of technology in economic progress is well recognized, but the introduction of AI cuts ice both ways, giving rise to gains and losses. Recent study of Price Waterhouse Cooper suggests 45% of total economic gains by 2030 will come from generative AI in creating product enhancements and stimulating consumer demand and will add US$15.7 to global GDP. This is encouraging for the global economy as it further emphasizes future potential for industrial productivity will be positive with contribution of AI. Discouraging news is that AI could displace millions of workers, creating a vast pool of jobless workers. A 2023 study by Goldman Sachs indicates that automation could eliminate 300 million full-time jobs, while another study by World Economic Forum suggests a significantly smaller net loss of 83 million jobs. Even then, transition to an AI-driven world will pose evolving challenges for policymakers and business leaders.

There are some valid concerns as AI business requires heavy usage of energy to maintain mammoth data centers. In a world where caution is towards conserving energy, such overuse of electricity grids for conserving data looks unwise. Captains of industry are already sending warning of overwhelmed electricity grids and rising energy prices, driven by higher transmission and distribution costs. Such activity will have far-reaching consequences for transition to green energy.

Rising Inequality

Inequality – not just in income and wealth but also in access to quality education, health care, and infrastructure – has long been recognized as a drag on economic growth. According to a 2023 Oxfam report, the world’s top 81 billionaires are wealthier than the bottom 50% of the world population. Simultaneously, slower growth in lower-income countries has stalled economic convergence, widening global disparities. The COVID-19 pandemic accelerated these trends, pushing nearly 100 million people into extreme poverty. And with access to energy and emerging technologies like AI becoming concentrated in developed countries, poorer economies risk falling even further behind.

Resource Scarcities & Energy Transition

Frenzied pursuits of industrialization and economic growth are a taking huge toll on natural resources. Resources such as arable land, potable water, energy, and wind and rare earth elements are becoming scarcer. Technological innovation may help countries to experience higher growth, but current geopolitical and geo-economics fragmentation are threatening to dry up such resources causing commodity prices to go up and experience inflation.

Demands towards consumption are rising due to increasing urbanization, population growth. Even AI induced measures are eating up natural resources as they demand higher energy requirement. Natural commodities products are becoming scarcer as countries are no more natural partners in trading. Global supply chain has to look for alternative regions that would raise the cost of production, risks and supply chain.

A major concern for world economy is how to achieve green transition. Speeding up the transition to renewables could offer a possible solution, but ongoing geopolitical strained relations, governmental debts and high capital costs continue to impede progress. The $2 trillion spent on clean energy and infrastructure in 2024, though a historic milestone falls far short of the $5 trillion in annual spending needed to stave off climate catastrophe.

Such impending dangers continue to thwart the natural flow of world economy and free and fair trade. Coupled with this are the Trump’s new presidency, highly fractured US domestic policy and extreme cases of unitary policies such as tariffs, subsidy which will only discourage genuine investors, business leaders and policy makers to find real areas of investment. Future green transition in fact is crying for such investments.

If such trends persist, world economy will continue to recede and will face prolonged stagnation that could lead to declining living standards and green transition an unrealized goal in the near future.

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>