The Global Economy Will Slow Even More!
The global economy is expected to decline this year before rebounding the following year. Growth will remain poor by historical standards, weighed down by the fight against inflation and Russia’s war in Ukraine.
Despite these hurdles, the picture is less bleak than we predicted in October, and it may mark a turning point, with growth bottoming out and inflation falling.
Economic growth in the third quarter of last year was surprisingly resilient, with healthy labour markets, robust household consumption and business investment, and better-than-expected adaptation to Europe’s energy crisis.
In other news, China’s unexpected reopening lays the path for a swift resurgence in activity. Furthermore, global financial circumstances have improved as inflationary pressures have begun to ease. This, together with the US dollar’s decline from its November high, gave some assistance to emerging and developing economies.
As a result, our growth predictions for 2022 and 2023 have been somewhat raised. Global growth will decline from 3.4 percent in 2022 to 2.9 percent in 2023 before rebounding to 3.1 percent in 2024.
The recession will be more pronounced in advanced nations, with GDP falling from 2.7 percent last year to 1.2 percent and 1.4 percent this year and next. Nine out of ten advanced economies are expected to slow.
Growth in the United States will decline to 1.4 percent in 2023 as the Federal Reserve raises interest rates. Despite evidence of resilience to the energy crisis, a mild winter, and considerable fiscal support, Eurozone conditions have deteriorated. With the European Central Bank tightening monetary policy and a negative terms-of-trade shock (owing to an increase in the price of imported energy), we forecast growth of 0.7 percent this year.
As a group, emerging market and developing countries have already bottomed out, with growth anticipated to pick up to 4% and 4.2 percent this year and next.
The limitations and COVID- Last year, 19 outbreaks in China slowed activity. With the economy officially reopened, we forecast 5.2 percent growth this year as activity and mobility improve.
India continues to be a bright spot. It will contribute for half of global growth this year, together with China, compared to barely a tenth for the US and the eurozone combined. Global inflation is predicted to fall this year, but even by 2024, estimated average annual headline and core inflation in more than 80 percent of countries would be higher than pre-pandemic levels.
Even while adverse risks have eased since October and several positive factors have gained relevance, the risks to the forecast remain skewed to the downside.
On the negative side:
China’s recovery could stall if current or future waves of COVID-19 infections cause more economic disruptions than expected, or if the property industry slows faster than expected.
Inflation may stay persistently high in the face of sustained labor-market tightness and rising wage pressures, necessitating tighter monetary policies and a greater decline in activity.
An escalation of the Ukrainian conflict poses a huge threat to global stability, with the potential to destabilise energy or food markets and further split the global economy.
A abrupt repricing in financial markets, such as in response to unexpectedly high inflation, could tighten financial conditions, particularly in emerging market and developing nations.
On the plus side:
Strong household balance sheets, strong labour markets, and solid pay growth may help sustain private demand while complicating the fight against inflation.
Reducing supply-chain bottlenecks and cooling labour markets due to reducing vacancies may allow for a gentler landing, necessitating less monetary tightening.
Priorities for policy
The inflation data is positive, but the fight is far from over. Monetary policy has begun to bite, with many countries experiencing a slowdown in new housing development. Nonetheless, inflation-adjusted interest rates in the eurozone and other economies remain low or even negative, and there is great uncertainty in many countries about the pace and effectiveness of monetary tightening.
