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2024 KIEP World Economic Outlook: Debt Capacity Stretched, Growth Squeezed

In its "World Economic Outlook 2024" released in November, the Korea Institute for International Economic Policy (KIEP) projects global economic growth at 2.8% next year. This forecast represents a 0.2 percentage point decline from this year's growth forecast of 3.0%. Notably, recent global economic forecasts by prominent organizations, including the KIEP, IMF, and OECD, have been revised upward for 2023 and downward for 2024.

The key theme of this outlook, "Debt Capacity Stretched, Growth Squeezed," captures our concern that major economies, in response to the COVID-19 crisis, have relied on low interest rates and expansionary fiscal spending. This has resulted in substantial increases in government, household, and corporate debt levels. While this response was deemed necessary during a more severe economic crisis than the Global Financial Crisis, the global economy now faces challenges from supply chain shocks, rising inflation, and elevated interest rates before achieving full recovery.

The premise is that the significant borrowing from the future under the guise of low interest rates, coupled with the impact of higher interest rates, will compel adjustments in consumption, investment, and spending, thereby weighing on overall growth. Given that the downside risks to the global growth outlook outweigh the upside potential, we outline three main risks.

First, there is a concern about the possibility of China's economy entering a medium- to long-term low-growth trajectory. Second, the combination of high debt and elevated interest rates could hamper growth. Third, there is the potential for additional geopolitical conflicts and subsequent supply shocks.

The global economy is grappling with complex and multi-faceted challenges that underscores the need for a comprehensive approach to various policy objectives. First and foremost is the need to steer a well-managed deleveraging of debt. Also, against a backdrop of geopolitical conflicts and supply chain fragmentation, a new imperative for security and stability must be integrated into the economic and policy analysis frameworks. Finally, the potential conflict between maintaining the competitiveness of the current industrial structure and promoting the next generation of industries must be reconciled within the broader framework of sustainability and energy transition.
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