Three Bright Spots in a Drab World Picture

The post-pandemic world has seen a wide divergence of economic fortunes among countries. 

High inflation, aggressive interest-rate increases by major central banks, turmoil on the financial markets, stagnating growth in Europe, a slow-moving financial crisis in China’s real-estate sector, as well as wars in Ukraine and Israel, all paint a bleak picture of the global economy.  

But there are a few splashes of color on the otherwise drab canvas: 

India might be the world’s next growth engine. Over the last 30 years, India’s economy has grown at an average rate of over 6% and gives no signs of slowing down. According to the International Monetary Fund (IMF), the growth rate is expected to reach 6.3% in both 2023 and 2024. While still poor, with per capita GDP only 40% that of China’s, India benefits from its relatively young workforce and the government’s efforts to improve the country’s infrastructure and deregulate an absurdly overregulated economy. India’s growth also relies more heavily than China on domestic consumption and the service sector. Many western corporations are recognizing all of that, which has led to an expansion in India’s export-oriented manufacturing sector as well.  

While India’s economy still has many flaws—including vast economic inequality, low female labor-force participation, and lingering sectarian conflicts—it is in a strong position to be one of the world economy’s primary growth engines. 

Japan appears poised to escape its economic trap. This island nation is unique among developed countries because it’s the only one yet to raise interest rates: The central bank’s main policy rate remains at negative 0.1%, while inflation sits at 3.2%. After almost three decades of deflation, a rebound in inflation might be what Japan’s economy needs to prop up long-stagnant consumption and investment spending. Low interest rates and the resulting weak currency also help Japan’s corporate sector, with investment and net exports both contributing strongly to GDP growth this year. The IMF currently sees GDP growth at 2.4% in 2023, with some slowdown expected in 2024. If Japan uses the current window of opportunity to dynamize its long-stagnant economy, it could return to a more favorable growth path in coming years. 

American consumers refuse to be tamed. The U.S. economy’s resilience continues to surprise despite the unprecedented scale of monetary tightening. Since early 2022, the Federal Reserve has raised interest rates by a cumulative 5.25 percentage points. While inflation remains above the 2% target, and high interest rates caused some turbulence in financial markets, the labor market remains tight and consumer spending continues at a high rate. While AMG expects the economy to slow down somewhat in the coming quarters, the slower growth would only mark a transition to a “new normal,” and likely not result in a deep economic downturn. Admittedly, the U.S. economy faces some significant risks, such as a further deterioration of the housing market, a potential government shutdown, and the effects of monetary tightening spinning out of control. However, it appears that the elusive “soft landing” scenario, where inflation is brought down without much of an economic fallout, seems increasingly possible.