Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic.
Global inflation is forecast to rise from 4.7% in 2021 to 8.8% in 2022 but to decline to 6.5% in 2023 and to 4.1% by 2024. Monetary policies should stay the course to restore price stability, and fiscal policies should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.
Looking Back
Upon assessing the year-end economic situation, we find to have a multi-faced economy, here we are having inflation, supply bottlenecks along with GDP growth. The global economy is at an inflection point after being hit by various shocks over the past year. The biggest was induced by central banks as they stepped up their aggressive fight against inflation.
Going forward, this interplay between inflation and central bank intervention will be key in determining the outlook for 2023. Economic consensus calls for weaker global growth similar to a short, possibly localized recession; falling elevated inflation and the end of rate hikes in most developed markets.
Inflation
Global real GDP growth is slowing rapidly, from 5% year over year in Q3 of 2021 to 3.3% in Q3 of 2022. As headwinds to global growth are intensifying, we expect yearly global GDP growth to moderate further to about 2% from Q4 2022 onward.
The world economy continues to suffer from a series of destabilizing shocks. Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. After more than two years of the pandemic, the Russian Federation’s invasion of Ukraine and its global effects on commodity markets, supply chains, inflation, and financial conditions have steepened the slowdown in global growth. In particular, the war in Ukraine is leading to soaring prices and volatility in energy markets, with improvements in activity in energy exporters more than offset by headwinds in most other economies. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic. Global inflation is forecast to rise from 4.7% in 2021 to 8.8% in 2022 but to decline to 6.5% in 2023 and to 4.1% by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.
Fitch Rating
Battle against Inflation Intensifies as Fitch Ratings has again lowered its world GDP forecasts for 2023 as central banks are forced to toughen up in their fight against inflation and China’s property market outlook deteriorates. Fitch now expects world GDP to grow by 1.4% in 2023, revised down from 1.7% in the September Global Economic Outlook (GEO). Fitch has lowered its 2023 growth forecasts both for the US to 0.2%, from 0.5% – as monetary policy is tightened more rapidly – and also China, to 4.1% from 4.5%. We have raised our Eurozone growth to 0.2% from -0.1%. The EU gas crisis has eased a little, but sharper ECB rate rises will weigh on demand. Europe Averts Gas Shortages the risk of European natural gas shortages and rationing this winter has receded as LNG imports have surged and gas consumption has fallen. But the crisis is far from over and high wholesale gas prices continue to weigh heavily on firms’ costs and household budgets.
History repeats itself
The current juncture resembles the 1970s in several key aspects. Stagflation the current multi-decade high levels of inflation, combined with sharply slowing growth, raise concerns that the global economy is entering a period of stagflation reminiscent of the 1970s. In the 1970s, large supply shocks amid accommodative monetary and fiscal policies resulted in prolonged stagflation. The policy tightening in the early 1980s to contain high inflation played a major role in triggering a global recession in 1982 and set off a string of EMDE debt crises.
- Supply disruptions driven by the pandemic and the recent supply shock dealt to global energy prices by the war in Ukraine resemble the oil shocks in 1973 and 1979-80. In fact, the increase in energy prices over the past two years has been the largest since the 1973 oil crisis.
- Global growth is decelerating sharply, with the current slowdown even more pronounced than the one following the 1975 recession.
- The monetary policy was highly accommodative in the run-up to these shocks, with interest rates negative in real (inflation-adjusted) terms for an extended period.
- With EMDE debt at multi-decade highs now, a rise in global borrowing costs may trigger financial crises, as it did in the early 1980s.
The stagflation experience of the 1970s is a reminder that there is a considerable risk that inflation will remain high or continue to rise. The supply bottlenecks and rising commodity prices that have contributed to elevated inflation could persist in the near term as a result of renewed pandemic-related lockdowns or continued commodity market disruptions. In the longer term, inflation may remain elevated as many of the factors that have contributed to low inflation in recent decades are slowing or in outright retreat. The growth of global value chains and the global labor force has fallen, the productivity gains from the reallocation of resources away from agriculture have waned, and technological progress has slowed. In addition, the commitment among some policymakers to disciplined fiscal and monetary policy frameworks could soften.
The pandemic has left profound marks in the form of lower investment, lower human capital, and a retreat from global supply chains, all of which are likely to dampen potential growth in the longer term.
Alongside the possibility of elevated inflation, global activity could remain anemic. Growth is already slowing, including in the world’s major economies. The United States is withdrawing policy accommodation, the euro area is suffering substantial spillovers from the invasion of Ukraine, and activity in China is being hindered by difficulties in the real estate sector and lockdowns to control COVID-19. Growth could remain feeble for a prolonged period, as many of its structural determinants have weakened. Demographics represent a growing headwind to potential growth. Labor productivity has slowed considerably since the global financial crisis, largely as a result of weakness in both investment and total factor productivity.
Impact of the Ukraine War
The world economy is paying a high price for Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine. With the impacts of the COVID-19 pandemic still lingering, the war is dragging down growth and putting additional upward pressure on prices, above all for food and energy. Global GDP stagnated in the second quarter of 2022 and output declined in the G20 economies. High inflation is persisting for longer than expected. In many economies, inflation in the first half of 2022 was at its highest since the 1980s. With recent indicators taking a turn for the worse, the global economic outlook has darkened.
The war in Ukraine is affecting EMDE regions to different degrees via impacts on global trade and output, commodity prices, inflation, and interest rates. The adverse spillovers from the war will be most severe for Europe and Central Asia, where output is forecast to sharply contract this year. Output growth is projected to slow this year in all other regions.
Except in the Middle East and North Africa, where the benefits of higher energy prices for energy exporters are expected to outweigh those prices’ negative impacts on other economies in the region. Risks for all EMDE regions are tilted to the downside and include intensifying geopolitical tensions, rising inflation and food shortages, financial stress and rising borrowing costs, renewed outbreaks of COVID-19, and disruptions from disasters. This edition of Global Economic Prospects also includes short analytical pieces on the risk of global stagflation and the impact of Russia’s invasion of Ukraine on the global economy through global energy markets.
Global Energy Markets
Implications for energy markets and activity. Russia’s invasion of Ukraine has disrupted global energy markets and damaged the global economy. Compared with what took place in the 1970s, the shock has led to a surge in prices across a broader set of energy-related commodities. In energy-importing economies, higher prices will reduce real disposable incomes, raise production costs, tighten financial conditions, and constrain policy space. Some energy exporters may benefit from improved terms of trade and higher commodities production. However, on the net, model-based estimates suggest that the war-driven surge in energy prices could reduce global output by 0.8 percent after two years. The experience of previous oil price shocks has shown that these shocks can provide an important catalyst for policies to encourage demand reduction, substitution to other fuels, and development of new sources of energy supply.
Despite a boost in activity as COVID-19 infections drop worldwide, global growth is projected to remain subdued in the second half of 2022, before slowing further in 2023 to an annual growth of just 2.2%. Compared to OECD forecasts from December 2021, before Russia’s aggression against Ukraine, global GDP is now projected to be at least USD 2.8 trillion lower in 2023. There are many costs to Russia’s war, but this gives some sense of the worldwide price of the war in terms of economic output.
A key factor slowing global growth is the generalized tightening of monetary policy, driven by the greater-than-expected overshoot of inflation targets. Strict lockdowns associated with China’s zero COVID-19 policy have also impacted the Chinese and global economies. Shutdowns and property market weakness are slowing China’s growth to just 3.2% in 2022.
Impact on Trade
Goods trade slowed in the first half of 2022 as supply chains continued to be affected by the lingering effects of the pandemic, including disruptions in major Asian ports and lockdowns in key cities in China. In addition, Russia’s invasion of Ukraine and its repercussions have led to severe physical and logistical dislocations that have magnified pre-existing bottlenecks. Russia and Ukraine account for a small share of under 3% of global exports. However, many global industries rely on supplies of key commodities produced in the two countries, especially in Russia. Shortages and unprecedented increases in the prices of these inputs have rippled through global value chains (GVCs), leading to production standstills and elevated producer prices. At the same time, transport costs have increased, including in the wake of the war in Ukraine. Navigation and trade in the Black Sea have been materially disrupted, negatively affecting the transport of food and crude oil. Cargos and shipments held at Russian and Ukrainian ports have been rerouted through longer and more expensive routes.
Forecast for 2023
2023 is likely to see weaker growth, less inflation, and the end of rate hikes, with the U.S. just scarcely missing a recession, Europe contracting, and Asia offering green shoots for growth.
Global growth is projected to slow from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January.
There might be some big surprises in 2023. However, the situation varies from region to region. In contrast to forecasts for Western economies, Asia could offer green shoots for growth, particularly in India, and emerging market economies could further benefit as the Fed finds its peak rate and the dollar eases.
The US Economy
The current U.S. consumer prices are up to 8.2% year-over-year but are on a path to be up by just 2.4% YoY by the end of 2023. The U.S. economy should experience a soft landing and a tepid rebound versus the current prevailing view of a hard landing and faster recovery. The US Federal Reserve Bank can restrict its rate hiking due to slow growth and even slower inflation. It is expected that the target range to reach a peak of 4.5% to 4.75% by January 2023, hold at that level through 2023 and then decline steadily throughout 2024. Moreover, US Federal is not replacing maturing government bonds, such as Treasuries and mortgage-backed securities and so the housing market has already turned down hence selling mortgage-backed securities risks being overkill.
The US unemployment rate is expected to be 4.3% in late 2023. In the labor market, companies have slowed hiring, lean payrolls, and difficulty in filling skilled positions arguing against widespread layoffs in 2023. Net job gains have slowed markedly over the year and, together with a modest rise in labor force participation, will likely result in a slightly higher.
The Euro Economy
In October the Inflation was 10.7% and is expected to be the same in 2023. The euro area economy is to contract 0.2% in 2023 on the back of the ongoing energy crisis and tightening monetary policy. The European Central will hike rates to 2.5% in the first quarter of 2023 before it begins cutting rates in early 2024. The GDP in the euro region is expected to be 0.9% GDP growth in 2024, compared with the consensus estimate of 1.6%.
The Bank of England is thus likely to end its rate hikes at 4% and follow the Fed in cutting in early 2024. The U.K. economy grew 7.5% and estimated 4.2% in 2021 and 2022 respectively. Now, largely because of double-digit inflation, that’s slated to decline -by 1.5% in 2023, the greatest economic deceleration of any major economy, except for Russia. Meanwhile, the U.K. economy grew 7.5% and estimated 4.2% in 2021 and 2022 respectively. Now, largely because of double-digit inflation, that’s slated to decline -by 1.5% in 2023, the greatest economic deceleration of any major economy, except for Russia.
On the positive side, the region’s unemployment is at a record 6.6% low, employment and hours worked are above late 2019 levels and labor market participation is higher than it was before the energy crisis. Although labor markets may weaken, the increase in unemployment may be modest
Asian Outlook
Many countries in the Asian region are poised for growth in the year ahead that could prove positive for the rest of the world economy. This strength isn’t limited to Asia’s largest economies. Rapid normalization in Asia could lift many tides: bolstering export demand in Europe; improving supply chains and, in turn, offering an antidote to inflation; and allowing emerging markets to break out of a cycle dominated by the strength of the U.S. dollar.
- China: There is a significant improvement in the forecast of 3.2% growth for China in 2022, which is a sharp decline relative to average growth over the last decade. The recovery of private consumption could lead the economy to a modest recovery next year. It is expected that there might be a 5% growth in 2023, with most of that coming in the second half of the year.
- Japan: There is a positive forecast of 1.2% GDP growth for 2023, despite being below consensus. A well-developed economy and an aging population have kept growth relatively slow even in the best global macro environments. The Households have significant excess cash and deposits that should support growth in 2023.
- India: India has a favorable economic boom driven by offshoring investments in manufacturing and energy transition. The GDP is on track to expand by 6.2% in 2023 and 6.4% in 2024, while three megatrends, underpinned by the country’s advanced digital infrastructure, are putting India on a path of growth that might surpass Japan and Germany and soon become the world’s third-largest economy by 2027.
The author, Mr. Nazir Ahmed Shaikh is a freelance writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. Mr. Shaikh could be contacted at nazir_shaikh86@hotmailcom.