Abu Dhabi

Source: Mufakiru Alemarat

Dr. Ali Mohamed Al Khouri

The global economic landscape is a maze of challenges and opportunities. Last year saw the sharpest slowdown in global growth in 30 years, driven by tight monetary policies, high interest rates by central banks to tame inflation, and geopolitical tensions.

According to the World Bank report, global growth will slow to about 2.4 percent in 2024, compared to about 2.6 percent the previous year. This slowdown will be most evident in advanced economies, where growth is expected to decline to about 1.2 percent in 2024, compared to 1.5 percent in 2023. Developing economies are expected to grow by about 3.9 percent, which is more than one percentage point lower than what was recorded in the previous decade.

The role of monetary policy

In light of these indicators, central banks in advanced, developing, and emerging economies are expected to re-evaluate their economic strategies and change their monetary policies in the second half of 2024. This change may include easing the strict tightening measures applied to reduce inflation rates. This shift in monetary policy is a decisive factor in determining the nature of economic and financial market expectations for this year. However, the International Monetary Fund stresses the importance of managing this shift carefully to avoid financial market volatility, and stresses the need to search for new ways to stimulate sustainable growth.

The law of equilibrium in financial markets

In a context resembling a tightrope walk, financial markets are entrusted with the delicate task of balancing several factors, firstly, determining the neutral interest rate, the extent to which monetary policies are consistent with national economic and public finance structures, secondly, term premiums associated with returns on safe financial assets, the ability of their local markets to respond to risk assessments and economic forecasts, and finally, dealing with potential changes in long-term interest rates; which may add an element of uncertainty to future interest rate movements, affecting market expectations, and savings and investment decisions. This situation presents a set of interconnected challenges and opportunities for investors and policymakers alike, and the IMF stresses in this context the importance of making vigilant decisions in this scene to maximize opportunities and mitigate risks.

Challenges and Opportunities in Emerging Markets

Overall, emerging markets in 2024 will face a variety of challenges and opportunities, shaped by global economic trends and domestic dynamics. Countries such as India and China are poised to leverage their strong domestic markets and shift toward consumption-based economies, in contrast to export-driven countries such as Mexico, South Korea, and Taiwan, which may suffer from weak global demand. The relocation trend is expected to direct supply chain investments away from China to other emerging countries, although China still occupies an important position in global supply chains, thanks to its plans to dominate high-tech exports.

In the financial sector, emerging markets will offer attractive investment opportunities, particularly in hard currency debt, due to the high yield spreads. The local currency debt market is complex and highly influenced by monetary policies and external factors, such as oil prices and the strength of the US dollar. Emerging markets will go through a fundamental transition phase, requiring strong policy measures to harness potential growth and mitigate risks. The World Bank emphasizes the need for strong fiscal frameworks, especially for commodity-exporting countries.

Public Policy Recommendations

In this interconnected global economic environment, the responsibilities of policymakers are critical and complex. National central banks need to strike a delicate balance in their monetary policies and address the challenge of reducing inflation without constraining economic growth. This requires a thorough understanding of the domestic and international economic landscape and the impact of monetary policy decisions beyond their immediate borders.

For developing economies, there is an urgent need to strengthen national fiscal frameworks to better manage economic volatility and the challenges posed by the global economic downturn. Prudent and robust fiscal policies will provide these economies with the much-needed means to withstand external shocks and help stabilize their economic environments.

Today, the need to enhance global cooperation is greater than ever. The interconnected nature of today’s global economy means that challenges such as trade integration, climate change, and debt relief cannot be effectively addressed in isolation. Strengthening international cooperation and collaboration remains vital to creating a stable and sustainable global economic system.

Finally, investing in long-term growth should be a priority for all economies. This investment requires focusing on structural reforms and sectors that promise long-term growth prospects, such as technology, sustainable energy, and education. Resilient economic fundamentals support economies’ readiness to face future challenges and opportunities.

The road ahead for policymakers is undoubtedly challenging, but it offers opportunities for strategic policy reform and increased global cooperation. Balanced fiscal and monetary policies and a focus on long-term growth are the most important mechanisms for overcoming expected turbulence and achieving sustainable economic development.