During his speech at the SteelOrbis Italy Forum 2024 held on October 8 in Milan, Carlo Cottarelli, director of the education program in economics and social sciences at Università Cattolica of Milan and former director of the fiscal affairs department of the International Monetary Fund, talked about the perspectives for the global economy in the short and long terms, with a focus on single countries.
The first topic he addressed was global GDP. According to the latest data available from the IMF (July 2024), the global GDP growth rate is about 3.3 percent in 2024 and 3.3 percent in 2025, which was the average growth rate for several decades, until the end of the 1990s. When GDP started to grow more, up to four or percent - or even 10 percent in China - the 2008-09 crisis happened, Mr. Cottarelli explained, stressing the fact that such high growth rates are not so desirable, although the IMF believes more should be done regarding growth rates.
What emerges from a deeper analysis of this growth rate of around three percent is that advanced economies are growing a little less this year. The IMF projection indicates about 1.7 percent for 2024 and 1.8 percent for 2025 for advanced economies overall, including China. The leader is in fact India, with a likely growth of 6.5 to seven percent next year. Another emerging market which is worth mentioning, according to Cottarelli, is Africa. Africa also grew a lot in the last 25 years, although the gap between per capita income in Africa and Europe remains wide.
Going into detail about single countries, Cottarelli commented that the United States suffered much less than Europe from the Covid crisis: “Leaving aside the first quarter of the recession in early 2022 and basically no growth in the second quarter of 2022, quarterly growth rates have been very high in the United States. We're talking about a growth rate of 4.4 percent year on year in the third quarter of 2022, followed by 3.3 percent. The first quarter of 2024 was weaker, but we had a positive surprise in the following quarter, with a growth rate of three percent year on year in the second quarter of 2024, and the current projection for the third quarter is a growth rate of about 2.5-3 percent year on year.” Productivity is also increasing in the US, but much depends on the results of the presidential elections that will take place at the beginning of November. Nonetheless, the signals point to a continuous growth, which is one of the reasons why the US Federal Reserve decided to cut interest rates by 50 basis points. The employment rate in the US is at four percent, which is positive as well. On the negative side, they have a public debt to GDP ratio amounting to 122 percent, up from the 104 percent in 2015. “I don't know if this is going to force an immediate decline in the deficit – a lot will depend on who will be elected – but let's face it, both Biden and Trump before him have been very expansionary, although in different conditions, in the use of fiscal policy,” Cottarelli noted . In terms of projection, the IMF forecasts a GDP growth rate for the United States of 2.6 percent this year, with a decline to 1.8-1.9 percent next year.
A controversial issue concerns tariff policies. Until now, Trump and Biden - and now, Harris - have had very different approaches towards this topic, but it very likely that if the former is elected again, he will increase tariffs, hopefully excluding Europe, said Cottarelli, and this would have a major impact on the steel industry.
Europe, on the other hand, is in a very different situation. Although it has continued to grow, this has been at a fairly slow pace. Between the end of 2022 and now, the second quarter of 2024, the cumulative growth rate of the euro-area amounted to just one percent or less year on year, which means one third of the growth rate of the United States in the same period. In an hypothetical ranking, Germany would be at the bottom in terms of growth rates of European countries. We’d have Italy and France in the middle, and Spain and Portugal at the top. Portugal, in particular, was able reduce its public debt to GDP ratio by 31 percentage points in the last eight years. Germany is another issue, and what is happening there could be interpreted in two ways, according to Cottarelli. On the one hand, which he believes is the predominant interpretation, “Germany is facing structural problems. It was too dependent on gas from Russia and on exports to China. Now China is importing less, and so Germany is suffering. In this interpretation, Germany’s growth model must change, and that would of course take time,” he explained. On the other hand - and probably both interpretations are true - this slow pace of aggregate demand in Germany is once again related to excessive caution in the use of the fiscal policy. Germany could afford supporting domestic demand by cutting taxes or increasing spending, but it is failing to do so. The fiscal deficit in Germany did not go back to pre-Covid levels, but it went down too fast. This is crucial for Europe, because Germany is a key piece in the European economy. If the largest economy in Europe slows down - and the German government forecast is for a declining GDP this year - the whole EU suffers. As for Italy, it is doing better than in the past. Thanks to the removal of financial constraints in 2021-2022 due to the exceptional situation in that period, the Italian economy could afford to have a deficit of up to nine percent, and this helped a lot in the recovery. Now the European fiscal rules are tightening once again, but still allowing Italy to reduce its public debt to GDP ratio. This will continue to remain high for a number of years, said Cottarelli, but the government stated that in 2031 it will decline from the current 135 percent to 132 percent, and this is perfectly consistent with the new European rules.
Speaking of China, Mr. Cottarelli underlined the fact that the huge deceleration of the Chinese economy from a 10 percent to a 4 to 5 percent growth rate is just an arithmetic reflection of the denominator of a growth rate: “Given the same growth of the numerator, you have a declining growth rate. If you compare what happened in the last 10 years to the change in absolute terms of GDP in China, you see that the change stays more or less the same. What is bringing down the growth rate is simply the growth of the denominator.” Even the IMF projections talk about a growth rate of 5 percent this year and 4.5 percent next year. The most recent data, however, suggest some deceleration. The World Bank has now projected 4.8 percent for this year, 4.3 percent for next year. Finally, Goldman Sachs has recently brought down the 2024 growth rate to 4.7 percent, just a few weeks ago. What is really changing, said Cottarelli, is not the overall growth rate - although it is, in fact, diminishing - but the decline of domestic demand. This is due to a list of factors, including the consequences of the real estate crisis, with the huge steel production capacities of China leading to higher exports with an impact on steel producers in the rest of the world. The Chinese government has taken measures to change this situation, removing many home purchase restrictions, sharply lowering mortgage rates and most recently announcing a major monetary policy stimulus package. The question is whether this is enough. Although the stock exchange has reacted positively, when it was understood that there was nothing new to be announced in terms of fiscal policy, the enthusiasm waned. Now, what is preventing a further fiscal stimulus? On the one side, the government does not seem happy about supporting the real estate sector because this would reward the irresponsible behavior of real estate development. On the other side, the fiscal situation has become more complicated, as the public debt to GDP ratio shifted from 41 percent in 2015, to close to 90 percent, but we cannot exclude that the Chinese government will use those measures again, in case they need to do so.
In this overall positive scenario, there are three factors of uncertainty: the geopolitical situation, the financial markets situation, and inflation.
About geopolitical uncertainties
Recent wars and global crises happening in the last two years did not have a huge impact on the global GDP, as their consequences remained localized. Nonetheless, Cottarelli believes that these events will have a major influence on developments over the next ten years, as the recent news events are just the tip of an iceberg of the changes that have happened at a global level in the last 20 years. In this period, the economy and population in emerging countries have overcome developed countries. This means that the BRICS are growing much faster, and this will inevitably lead to further tensions.
About financial markets
After the 2008-09 crisis, financial regulations were tightened a lot, although not so much so to completely change the approach to financial regulations. The most recent increase in interest rates, which was equal or stronger than the one that caused the collapse in the abovementioned crisis, did not lead to major problems, and this means that the system is holding. Having said that, the world financial sector remains not very transparent, and there is still a “grey area;” Cottarelli said.
About inflation
“The worst is behind us in terms of inflation,” he said. Inflation rose in 2021-22 because monetary and fiscal policies were jointly used in a very expansionary way to boost a recovery after the pandemic, and this showed up in higher commodity prices. Once the central bank understood that they were pushing too much, they corrected the monetary policy, leading us to go back to inflation rates that are relatively low, close to two percent. For example, in Europe the year-on-year inflation rate in September went down below two percent, so the trend is declining. “This will lead, in my view, the ECB to cut interest rates further before the end of the year. Probably the Fed will do the same,” he concluded.
Mr. Cottarelli also gave a quick perspective on the long-term situation, citing a continuous increase in military spending and the issue of the green economy, which is fundamental in the steel sector. He shared a pessimistic view in this sense, as he believes there are still a few “asymmetries” preventing the world from really engaging in that area. First of all, an asymmetry between the cost allocation that falls on current generations and the benefits that will fall on future generations. Secondly, the fact that the costs of decarbonization are not equally spread across all sectors, and finally, the major asymmetry between the interests of advanced economies - which have already decarbonized a lot - and emerging markets, which are still in the process of increasing CO2 emissions. “The steel industry has done quite a lot in terms of decarbonization, although in advanced economies this has not yet been perceived by public opinion,” he concluded.