INTERVIEW | The global economy will grow faster than expected. The predicted figure for Russia has been doubled

ИНТЕРВЬЮ | Мировая экономика будет расти быстрее, чем ожидалось. Прогнозируемый показатель для России увеличен в два раза

The global economy is expecting stronger growth, UN economists predict. INTERVIEW | The global economy will grow faster than expected. The predicted figure for Russia has been doubled Economic development

UN economists have revised upward their global economic growth forecasts for 2024. On Thursday they published a report with updated predictions, in which they presented higher figures for a number of countries and regions – compared to January forecasts. The most significant revision concerned Russia. The UN News Service asked Grigor Aghabekyan, an employee of the UN Department of Economic and Social Affairs, about the reasons for the more confident growth of global GDP.

UN News Service: The forecast for the global economy has been revised to stronger growth from 2.4 percent to 2.7 percent. In particular, the US economy is predicted to perform much better, growing by 2.3 percent instead of the previously predicted 1.4 percent. Is this due to a decrease in inflation or other factors?

GA: Indeed, upward revisions to global economic growth projections largely reflect improved prospects in the United States, but also in a number of large developing countries, notably India and Brazil, as well as the Russian Federation.

In the United States, despite long expectations of an economic recession or so-called “soft landing,” economic activity remains dynamic, and this is despite a fairly tight monetary policy: interest rates are at their highest levels since 2001. 

This dynamism is one of the reasons for the more optimistic forecast. The main driver of aggregate demand in the American economy is active spending by consumers whose financial situation has improved. Many still have residual savings accumulated during the pandemic, particularly from social benefits, and a tight labor market has led to rapid increases in nominal wages, especially among low-wage workers. 

The current situation in the American economy is somewhat atypical. Steady growth with low unemployment is, of course, a good picture. However, inflation remains above the target of 2 percent, at about 3.5 percent in March and April. 

The unemployment rate in March this year was 3.8 percent, which is slightly higher than the historical low of 3.4 percent recorded in April 2023, but this small increase is largely due to the increase in economic activity of the population, that is, those who were previously passive began to look for work. This situation raises difficult questions about the future path of Federal Reserve monetary policy. 

By the way, I would like to note that this policy has significant consequences for the rest of the world, especially for developing countries. The fight against inflation in the United States leads to a strong dollar, capital flight from developing countries and the weakening of their currencies, and as a result, accelerated inflation in these countries.

UN News Service: Why forecasts for the European Union were revised downwards?

GA : The situation in the European economy, if we talk about the continent as a whole, is heterogeneous. For both the EU as a whole and the euro area, we expect a gradual recovery in economic activity in 2024 and 2025, following marked stagnation in many European countries over the past year. By the way, for the UK, which is not part of the European Union, the forecast has been revised upward.

This should be supported by lower inflation (inflation in Europe is falling faster than expected thanks to sharp declines in energy prices), rising real incomes and expected monetary easing. By the way, a number of central banks in Eastern Europe and the Swiss central bank have already cut their key interest rate, and as inflation returns to its target level, the European Central Bank and the Bank of England are also expected to begin an easing cycle this year. It is also expected that as global trade recovers, exports from European countries will increase. 

As for the slightly more modest forecasts for the European Union compared to those presented in January, the revision comes as growth forecasts for a number of manufacturing-dependent countries on the continent have been downgraded amid continued sluggish industrial production. This list includes, inter alia, Austria, Hungary, Germany, Finland and the Czech Republic. Meanwhile, Germany’s EU-leading economy shrank by 0.3 percent in 2023, and we expect a recovery of just 0.3 percent in 2024. 

In many countries in southern Europe, by contrast, economic prospects are generally more favorable, thanks in particular to the strong recovery of the tourism sector after the pandemic, as well as funding from the European Union’s €648 billion Recovery and Resilience Facility.&nbsp ;

A very positive fact is the significant reduction in unemployment, which was an acute social problem in Greece, Spain, and Italy. For example, if in Greece the unemployment rate in 2015 was close to 30 percent, then at the beginning of 2024 this figure was slightly above 10 percent, similar figures for Spain. True, the situation with youth employment remains problematic in a number of European countries, despite certain progress achieved thanks to targeted EU programs. 

UN News Service: The most significant revision concerns the Russian economy. If in January you predicted growth of 1.3 percent in 2024, now it is already 2.7 percent. Prospects for a number of other countries in the post-Soviet space have also been revised upward. What influenced the change in forecasts for the region?

GA:  In our short report (it is a small update of our main publication, which we presented in January), we provide a specific figure only for the Russian Federation, so we would not like to comment on the revision of forecasts for other countries in the CIS space. 

I would like to note one technical detail – the figures given in the report are forecasts prepared around mid-April, and naturally, new information has appeared during this time. In particular, preliminary estimates of the performance of the Russian economy for the first quarter of 2024 have appeared – it is assumed that growth exceeded 5 percent. 

Boosted by rising oil prices, economic activity and one-time tax payments, federal revenues surged in the first quarter, resulting in a smaller budget deficit than at the start of 2023. Decisions were also made on national development goals until 2030. Taking into account significant budget expenditures and the continuation of the import substitution policy, it is quite possible that in both 2024 and 2025 the performance of the Russian economy will be slightly better than predicted in our report, and growth in 2024 could exceed 3 percent, but at the same time a significant part of the growth will have to do with the military-industrial complex. 

But in today’s geopolitical situation it is difficult to say anything with confidence. All the risks to the Russian economy that are noted in our report remain. Despite the fact that Russian oil was sold at a discount, Russia has so far managed to circumvent the $60 per barrel price cap on Russian oil imposed by the G7 and the European Union. It has also largely circumvented restrictions on the import of high technology and dual-use goods through complex import schemes. However, those countries that have imposed sanctions are constantly trying to achieve their compliance, in particular, they are trying to complicate the insurance conditions for tankers carrying Russian oil, and more closely monitor the export of their products, trying to “figure out” the final buyer. 

In today’s geopolitical situation, it is difficult to say anything with confidence. All of the risks to the Russian economy identified in our report remain

Potential restrictions on access to high technology pose a risk to long-term growth prospects . In addition, while the war is going on in Ukraine, additional sanctions are being introduced, for example, the European Union is now developing the 14th package of sanctions against Russia, which should include measures against the liquefied natural gas production sector. 

The European Central Bank is insistently demanding that European banks remaining in Russia sharply reduce their balance sheets, which in turn will complicate the work of European companies in the Russian market. Recently, American and British sanctions were adopted against aluminum, copper and nickel of Russian origin, prohibiting not only imports, but also their trading on world metal exchanges and over-the-counter trading. Of course, all this affects budget revenues. Increasing delays in financial transactions by Chinese and Turkish banks, in particular, are negatively impacting both Russian exports and imports.

Labor shortage is also a risk factor and it is not entirely clear how much labor migration will fill this gap. In particular, after the terrorist attack in Moscow in March of this year, new, apparently stricter rules regarding the employment of migrants in Russia are being developed. A number of Russian regions have already introduced restrictions on the work of migrants in some areas, mainly in the service sector. In conditions of labor shortages, economic growth should, in theory, be generated by increased labor productivity and innovation. 

But if these innovations occur primarily in the military-industrial complex, then to spread them to other sectors of the economy, market interest is necessary: ​​for example, American and European companies receiving defense orders and engaged in technical development are also actively present in “civilian” production.

As for the rest of the CIS countries and Georgia, at the beginning of 2024 economic activity in most of them was high. The decrease in inflation made it possible to soften monetary policy. Energy exporters Azerbaijan and Kazakhstan will benefit from rising oil prices from early 2024. Other economies in the Caucasus and Central Asia continue to benefit from the relocation of Russian enterprises and the growing opportunities for re-exports to the Russian market. However, the planned tightening of rules for hiring migrant workers in the Russian Federation is likely to reduce remittance flows and create pressure on domestic labor markets.

News Service UN: What awaits the Ukrainian economy this and next year?

GA:Ukraine’s economy grew 5.3 percent in 2023, but that came after a sharp contraction of nearly 30 percent in 2022. In fact, the country lost about a third of its economic potential as a result of war, the destruction of productive capital and mass emigration. Part of the production potential was evacuated from the eastern regions to the western, relatively safer ones. 

In 2023, under war conditions, private consumption recovered somewhat, investment recovered slightly, and some restoration work was carried out. The opening of a new Black Sea route has helped Ukraine export agricultural products and compensate for periodic blockades by Poland caused by protests by Polish farmers and shippers. There were also blockades by Czech and Slovak farmers complaining about cheap Ukrainian products, which created obstacles to exports through the transport infrastructure of Eastern Europe. To support the Ukrainian economy, the European Union recently extended a temporary agreement on duty-free imports of agricultural products from Ukraine, albeit with a number of restrictions. 

In 2024, probably, economic growth will be Ukraine will be more modest, as recent large-scale attacks on Ukraine’s energy infrastructure have led to very serious damage and electricity shortages, which will be especially severe in the winter, limiting industrial production unless the country can at least partially cope with these shortages by creating, with foreign assistance, decentralized power generation system by winter. 

Given the massive spending, Ukraine’s budget deficit in 2024 could be in the range of $38–42 billion, highlighting the need for external financial assistance as Ukraine is largely cut off from private capital markets. At the same time, more than half of the budget is spent on defense spending. The European Union will provide Ukraine with significant budget support in the amount of 50 billion euros for 2024–2027. External financial assistance, in particular to cover budget deficits, is also provided by the International Monetary Fund and other parties. Most of this assistance comes in the form of loans, which leads to an increase in external debt. 

Read also:

Ukraine’s needs for restoration and reconstruction are estimated at $486 billion

External debt is one of Ukraine’s problems. The country achieved a deferment of the payment of external debt on its bonds until 2027 from a group of official creditors (including the UK, Germany, Canada, France, the USA, Japan), which was approved by international creditors, including the IMF. But Ukraine also needs to restructure its commercial debt, preferably before the two-year payment freeze agreed upon by holders of its $20 billion in international bonds expires at the end of August, or seek an extension to the current moratorium on payments.

Of course, we can talk about long-term prospects and large-scale restoration of the country only after the end of hostilities. The estimated cost of post-conflict reconstruction in Ukraine at the end of 2023 has been revised upward to $486 billion, an estimate from a group of organizations including the World Bank, the United Nations and the European Union. Probably, taking into account the latest damage to the energy infrastructure, this figure will be increased again. There is currently no complete clarity on the issue of financing the restoration; various options are being considered, including the issue of bonds secured by the frozen assets of the Russian central bank. The European Union plans to send income from frozen Russian assets (which are mainly located in the Belgian depository Euroclear) to help Ukraine, but this amounts to about 3 billion euros per year.


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