EconomyIssue 04 - 2023MAGAZINE
GBO_ Global economies

Global economies & the challenges ahead

Forecasts for inflation in 2024 have been upgraded, and underlying inflation is expected to drop more gradually

The global economies have demonstrated short-term resilience, despite ongoing difficulties. However, according to an IMF assessment, the predicted rate of global growth will decline from an estimated 3.5% in 2022 to 3% in both 2023 and 2024.

The most recent World Economic Outlook (WEO) report states that while the estimate for 2023 is slightly higher than what was expected in April 2023, it is still weak by historical standards.

The increase in policy rates by central banks to combat inflation continues to harm economic growth. It is anticipated that global headline inflation will decrease from 8.7% in 2022 to 6.8% in 2023 and 5.2% in 2024. Forecasts for inflation in 2024 have been upgraded, and underlying (core) inflation is expected to drop more gradually.

In May, the World Health Organisation (WHO) declared that COVID-19 is no longer a ‘global health emergency.’ The majority of the supply chains have recovered, and shipping prices and supplier delivery times have returned to their pre-pandemic levels. But the factors that limited growth in 2022 still exist. The purchasing power of households continues to decline due to excessive inflation.

As a result of central banks’ tightening of policy in response to inflation, borrowing has become more expensive, which has limited economic activity. Although there are no longer any immediate worries about the state of the banking industry, high-interest rates are still affecting the financial system, and banks in advanced economies have dramatically tightened lending requirements, reducing the availability of credit.

Higher interest rates hurt state finances, especially in developing nations where high debt costs are limiting the ability to make essential investments. As a result, output losses relative to pre-pandemic projections continue to be significant, particularly for the world’s poorest countries.

According to the WEO, the first quarter of 2023 saw robust growth in the global economy, largely due to the services industry. The slowdown is concentrated in advanced economies, where GDP will decline from 2.7% in 2022 to 1.5% this year and 1.4% the following year. The euro area is expected to decelerate substantially since it is still reeling from last year’s sharp spike in gas prices.

In contrast, growth in emerging markets and developing economies is still anticipated to accelerate, with annual growth increasing from 2022’s 3.1% to 4.1% this year and next. However, this average masks significant differences between countries, with emerging and developing Asia increasing well this year at 5.3%, while many commodities producers will experience a fall in export profits.

What will be ME, US, and EU growth?

It is anticipated that growth in the Middle East and Central Asia will slow from 5.4% in 2022 to 2.5% in 2023, a decrease of 0.4 percentage points. This decline is primarily due to Saudi Arabia, where growth is projected to slow from 8.7% in 2022 to 1.9% in 2023, a decrease of 1.2 percentage points.

The reduction in Saudi Arabia’s rating for 2023 reflects production cuts that were announced in April and June following an OPEC+ agreement, which also includes Russia and other non-OPEC oil exporters. In contrast, strong non-oil GDP growth is still supported by private investment, including the implementation of ‘giga-projects.’

The growth in the US is predicted to decrease from 2.1% in 2022 to 1.8% in 2023 and then further to 1% in 2024. The prediction for 2023 has been revised upward by 0.2 percentage points, due to strong consumption growth in the first quarter and a still-tight labour market that has supported increases in real income and resurgence in car purchases.

According to Trading Economics, the GDP of the European Union expanded by 0.5 per cent on a year-over-year basis in the second quarter of 2023. It was the fastest rate of growth since the recession of 2020–2021, due to a significant increase in real incomes and falling interest rates. Model-based research reveals that while broad price-increasing supply-side variables contribute to inflation persistence, the improved prognosis is mainly by the terms-of-trade counter shock brought on by falling energy prices.

According to Eurostat’s preliminary flash estimate, GDP increased by 0.3% in the EU and 0.1% in the euro area in 2023-Q1, which is somewhat more than what was predicted in the Winter Intermediate Forecast. This favourable outcome was supported by declining energy prices, easing supply limitations, increased business confidence, and a robust job market. Regarding inflation, despite a substantial reduction in energy prices in the first quarter of 2023, the headline index kept falling, but core inflation firmed, suggesting that price pressures persisted.

The quick diversification of supply and a sizable decrease in consumption helped the EU handle the energy crisis well. Gas storage levels are at acceptable levels as the EU moves closer to the gas replenishing season, and the likelihood of shortages over the next winter has significantly decreased. The EU is anticipated to be able to continue replacing fossil-based sources, notably gas, while lowering the possibility of new price pressures thanks to increased supply diversification and the acceleration of renewable energy generation.

In comparison to market expectations at the time of the preceding Commission prediction, wholesale petrol prices were anticipated to be 25% in 2023 and 13% in 2024, during the forecast. In both 2023 and 2024, oil prices were predicted to be 10% lower than they were in early February.

Among EU members, Germany, France, Italy, and Spain have the largest economies. On the expenditure side, household consumption makes up the majority of GDP and accounts for 56% of its total use, followed by government spending and gross fixed capital formation. Around 42% of GDP is accounted for by imports, which increases overall GDP by 4%, whereas 46% of GDP is accounted for by exports of goods and services.

Impact of trade

Global trade growth is predicted to be significantly lower than the 4.9% average of 2000–2019, falling from 5.2% in 2022 to 2% in 2023 and then increasing to 3.7% in 2024. In addition to the direction of global demand, the fall in 2023 also reflects changes in the composition of that demand towards domestic services, lagging effects of the US dollar’s gain (which slows trade because products are frequently invoiced in US dollars), and rising trade obstacles.

These projections are predicated on several hypotheses, including those relating to interest rates, commodity prices for fuel and non-fuel goods, and gasoline prices. Due to the downturn in global economic activity, oil prices are expected to decline by around 21% in 2023 after rising by 39% in 2022.

Manufacturing and other non-services sectors have displayed weakness, and high-frequency indicators for the second quarter indicate a general slowdown in activity. Businesses have reduced their investment in productive capacity due to a decline in consumer demand for goods, increased uncertainty about the geoeconomic landscape of the future, weak productivity growth, and a more difficult financial environment, according to the reports.

Major industrialised nations’ gross fixed capital formation and industrial production have either severely slowed down or shrunk, dragging along global commerce and industry in developing economies. International commerce as well as manufacturing demand and output indicators all indicate further deterioration.

Chain’s recovery waning

After receiving a boost from the reopening, China’s recovery is waning. When Chinese authorities abandoned their strict lockdown policies at the beginning of the year, manufacturing activity and service consumption in China recovered. Net exports significantly contributed to sequential growth in February and March as supply chains normalised and businesses quickly put backlogs of orders into production.

Despite this, the real estate sector’s persistent difficulties are impacting investment, foreign demand is still sluggish, and rising and elevated youth unemployment (at 20.8% in May 2023) points to labour market weakness. High-frequency statistics up to June indicate that momentum will start to wane in the second quarter of 2023.

Global interest rate assumptions have been updated upward to reflect an actual and signalled tightening of policy by major central banks since April. The Federal Reserve and the Bank of England are now anticipated to be more than those predicted in April 2023 by WEO. It is to peak roughly 5.6% in the case of the Federal Reserve, before reducing them in 2024.

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