Weathering the storm
Short-term thinking should not distract from the promises of the future as we look to harness economic growth amid global uncertainty
The past three years have packed in a century’s worth of shocks, from the Covid-19 pandemic to geopolitical conflict to an end of the era of low interest rates – an era in which many policymakers and corporate leaders cut their teeth and built their careers. Furthermore, pandemic-induced spending has led global public debt to approach record levels: the global debt stock grew by $8.3 trillion to a near-record $305 trillion in the first quarter of 2023.
As international leaders prepare for the G20 summit in New Delhi, the world economy is at an inflection point, and the choices we make now will determine its fate for decades to come. It is imperative not to let short-term uncertainty steal the focus from achieving long-term prosperity.
Global growth must accelerate beyond current forecasts. The World Bank has recently sounded the alarm for a potential ‘lost decade’ for global growth, predicting a nominal rise in gross domestic product this year. In a world where billion-dollar climate disasters have been called the ‘new normal’, we face a growing urgency to transition to a low carbon – and ultimately net zero – economy. If we are to tackle climate change, reduce government debt and alleviate poverty, the projected growth rate falls woefully short.
To unlock growth, we need to catalyse a greater influx of private investment globally – investment in new technologies, sustainable investment vehicles, digital transformation and more. Financial institutions, particularly banks, are key to realising this vision. They are the primary engines of economic activity, furnishing a significant majority of finance that reaches companies and individuals worldwide, close to $26 trillion in total. Even amid recent investor concerns, the global banking system remains robust and liquid, fortified by the more than $1.2 trillion in high-quality, loss-absorbing capital added since 2007.
For the green transition
Building broad, liquid and sustainable capital markets is crucial for the green transition and global growth. An IIF-McKinsey report found achieving net zero emissions would require an additional $3.5 trillion per year (60% more than current investment levels). Capital markets can help allocate these resources effectively, channelling funds into sustainable businesses and projects that play a pivotal role in combating climate change. Indeed, green and sustainability bonds are already one of the fastest growing segments of the capital markets. With the green debt universe surpassing the $5 trillion mark in the first quarter of 2023, the Institute of International Finance projects global sustainability linked debt issuance to climb to $1.7 trillion in 2023 and near $2 trillion in 2024.
Beyond the climate change imperative, the growth of digital technologies presents powerful opportunities to accelerate growth. The financial sector continues to fund and support technology firms worldwide, nurturing advancements from artificial intelligence to robotics to advanced data analytics. Additionally, financial firms are streamlining their operations with digital technology – technology outlays of some of the biggest financial services firms have grown markedly in recent years, reaching 17% of operating income in 2021, on par with some the world’s largest tech companies (Apple at 12%, Google at 20% in the same year). In 2023, total IT and technology spending by banking and investment services hit more than $650 billion. The digital transformation we are seeing within financial services is a culture change, accelerated by the pandemic, that will help foster innovation, improve customer relationships and, ultimately, facilitate growth.
So as we look ahead to the New Delhi Summit, we urge leaders around the world not to let short-term thinking distract from the promises of the future. That means taking the long view, with an eye to facilitating inclusive global growth and tapping the full force of the financial industry to help power economic transformation towards a dynamic, resilient and sustainable 21st-century global economy.
