The impact on the Russian economy has still yet to be fully assessed, but it seems to have been strong in 2022 albeit short lived. The counter-effect on the EU economy has been much slower to develop, peeking in 2023, but seems now quite obvious. Globally, sanctions against Russia have led to a dramatic acceleration in changes that have already been visible for years, Jacques Sapir writes.
Forecasts for the global economic activity are now getting a little better than they were in 2023, as inflation recedes globally. Still, a large number of problems persist, which are reflected in slightly less growth projected for 2024 than in 2023. One of the more intractable is the fact that economic growth is now sharply diverging between large geographic zones. We are living on the same planet but clearly not the same way. Growth is now forecasted to reach 2.9% in 2024 but at only 1.3% in the EU and 1.4% in the USA versus 4.6% in China and probably 6.0% in India. While Asia, mainly China and India, are enjoying strong growth which benefits neighbouring countries, the story is not the same for Europe or the USA. In this sense, 2024 is expected to witness an accelerated wealth shift from West to East.
The European economy clearly is a problem in itself. Growth was very low last year, and some countries, notably Germany, even witnessed a mild recession. There is room for improvement during the coming year, but not much.
Amid heightened geopolitical uncertainty, a situation which was not eased by so-called Union Foreign Policy or via the foreign policy of some country members, the future evolution of energy prices remains a concern for most EU economies, particularly Germany. The energy price shock, largely resulting from the effects of economic sanctions taken against Russia, has more than dented cost competitiveness in the EU. This has been obvious in particular for the more energy-intensive Member States and industries. As a matter of fact, some large enterprises (such as chemicals and car-making) are leaving Germany for the US. This offshoring process has mostly been the result of much cheaper energy prices in America.
As energy prices decreased sharply in 2023, the large inflation differentials across Member States have only partly subsided. Together with dispersion in wage growth, price differentials could result in enduring competitiveness gaps in some Member States. Moreover, with energy prices and thus input costs continuing to be higher than those of trading partners, closing the gap in productivity growth compared to peers remains crucial to preserve global competitiveness. One serious problem frequently overlooked has been the significant drop in labour productivity in some EU countries, a drop that at first was not related with the energy shock but was clearly aggravated by it (mostly in Germany and France).
Inflation is estimated to have dropped to a two-year low in the euro area in October and is set to continue declining over the forecast horizon. While the moderation over the past year was mainly driven by the sharp fall in energy prices, it has now increasingly become broad-based across all main consumption categories, beyond energy. Nevertheless, non-monetary inflation causes are still present in EU countries. As monetary tightening keeps working its way through the economy, inflation is set to continue declining, though at a more moderate pace, which means that monetary tightening is too losing its effects. This inflation reduction process is reflected in the easing of inflationary pressures affecting food, manufactured goods and services. However, household consumption has been hit hard and has considerably changed over the last two years.
As a result, the European economy has lost the momentum it had following the Covid-19 pandemic, against the background of higher living costs, weak external demand and monetary tightening. This explains the reduced EU GDP growth compared to summer 2023 projections. After a challenging year, economic activity is, however, expected to modestly recover going forward, even if some EU countries, like France, are expected to suffer in 2024. Consumption is picking up on the back of what is being called a “still robust labour market” by the EU commission, but is as a matter of fact a labour market which compares badly (unemployment is still at 6.0% of the labour force) with the US or UK. Sustained wage growth and the continued easing of inflation are nevertheless expected to boost consumption, but consumption per capita is probably still lower than it was in late 2019, and that could fuel a strong social movement across different countries.
The US economy is expected to grow at a similar rate than the EU, or 1.4%, after having displayed much better results in 2023 (2.4% against 0.6%). This lower growth rate is probably to be attributed to the end of the political cycle and to the loss of momentum of some very important measures taken by US President Joe Biden, like the Inflation Reduction Act (IRA). The US government has bought some extra-growth by increasing its budget deficit. But the new geopolitical situation has shed some light on to the real situation of the USA and mostly its dependence on foreign lenders. The fact that the US government has let companies import Russian crude again at $74 per barrel, despite a formal commitment made at the G-7 summit not to do that, is clearly a signal.
Of course, it must be added that most of the counter-shock has been suffered by the EU, because of the large volume of trade with Russia it has seen evaporate. The EU lost probably 1.8% of its GDP because of the direct and indirect effect of sanctions over the last 15 months and will probably lose at least 0.6% in the coming year. It is clear that Russia-US trade is dwarfed by Russia-EU trade, so a counter-shock impact is much less visible. However, it certainly exerts an influence on US growth by constraining, or making costlier, its access to most needed goods. Indirectly sanctions weight on trade because they reduce the willingness of some countries to develop their trade with the US. Then, 2024 is to see the end-results of economic sanctions against Russia with their different implications on global trade.
It appears now that 2024 is to see the continuation of a process that has been developing since the late 1990’s, where emerging and newly industrialised countries are taking the lead, both in GDP volume and in GDP growth. If we compute their share in World GDP (in PPP), we could see that BRICS countries, which had a weighting of 29.0% in 2017, will probably account for 32.6% by the end of this year. If we look at the five initial countries plus the five that joined the organisation by January 1, 2024, the move is from 33.0% in 2017 to 36.7% by the end of 2024. Now, if we take a 16 country group representative of what has been called the “collective West”, we can see that its share in World GDP is set to fall from 38.3% in 2017 to 35.0% by the end of this year.
As emerging countries have larger and larger GDPs, the pace of their GDP growth also exceeds that of “collective West” countries. Not only do BRICS+ countries have a larger share of global GDP, they have become the very centre of global growth for years to come. Of course, that doesn’t mean that “Western” countries have no relevance at all. The US economy still accounts for around 15% of global GDP, slightly less than twice the weight of the third ranking country, India. The EU accounts for around 13%.
But they no longer exert a dominant power on the global economy. This is a very significant change and one that will certainly be confirmed by the end of 2024.
So, the year to come will neither witness a disaster nor an upheaval, but an acceleration on a trend that could be seen as early as 2008 but which is, without doubt, accelerating.
