Signs of hope for the global economy?

We’ve upgraded our global GDP forecast for 2023 to 2.4%, which is a slowdown from 2022 but a significant improvement on earlier predictions. We’re now forecasting a subdued 2.0% for global growth in 2024.

We predict that global trade growth will slow to 1.9% in 2023, from 3.2% in 2022, with a slight recovery in 2024 to 2.5%. Our forecast is in line with the prediction that the relationship between trade growth and GDP growth has settled to 1:1.

So what’s behind these predictions, and why are we a little more optimistic than we were at the start of the year? Let’s take a closer look at the evidence.

Inflation passes its peak

We think there are a number of reasons for cautious optimism. When China finally removed Covid restrictions, it did so quickly and completely, providing a significant boost to world trade. At the same time, in part thanks to generous government support, the US and eurozone both proved relatively resilient in the face of high energy prices, which are now coming down.

Rocketing energy prices were one of the factors behind spiking inflation rates in a number of major economies. We think inflation has now passed its peak, and will continue to fall through 2024. Central banks have been raising interest rates to curb prices, and that will gradually take effect over the coming months.

Emerging economies fare better

These are positive indicators, but we should stress that the global economy is walking a tightrope. A misstep either way could plunge some economies into a new inflationary spiral and others into recession. China, for example, has recently slipped into deflation as its recovery falters.

Other economies are struggling to find the right balance between monetary tightening and economic growth. Rising interest rates curb inflation but dampen economic activity and increase borrowing costs for business.

For these reasons we expect global GDP growth in advanced economies to remain at an anaemic 1.3% in 2023, falling to 0.6% in 2024. Emerging market economies (EMEs) will fare better, with forecast growth of 3.9% in 2023 and 3.8% in 2024. Asia will be the chief contributor to that total, with Latin America lagging some way behind.

This is the most likely scenario but it isn’t the only possibility. In the US and eurozone especially, core inflation (excluding energy and food) has proved stickier than expected. If it stays well above targets, central banks may be tempted to raise interest rates further, as the Bank of England has recently done. That could drive growth into negative territory.

Threats to our forecasts

Our forecasts are based on the assumption that central banks stay largely on that tightrope. Monetary policy reducing inflation without pushing economies into recession.  Interest rates plateau at current levels or just a little above.

But there are other possibilities and other variables. One assumption we had to make was that the economic impacts of the war in Ukraine remain largely the same throughout the forecast period. The war may or may not end in that time, but tensions between the West and Russia will likely remain anyway, and sanctions too.

We also think that lockdowns are probably over, regardless of any flare up of Covid or another virus. If they do return, they are likely to be limited and temporary.

We assume that spending patterns of money saved up during the pandemic won’t change much. Excess savings were in the range of 5.1% to 9.2% of GDP for the eurozone, US, UK and Japan by the end of 2022. US consumers have been freest in spending that excess up to now, followed by their UK and Japanese counterparts. Eurozone consumers have been comparatively cautious.

Businesses in many economies were buffered from the worst effects of pandemic lockdowns by government support, which also stepped in to blunt the edges of energy price hikes. Pandemic schemes have now ended and energy support is tapering off. We expect this to continue, but also for governments to step in again in the event of further economic shocks.

The end of interest rate hikes?

Perhaps our most important assumption is that inflation will gradually fall, but won’t reach central bank targets until well into 2024 and perhaps later. We don’t foresee another energy price shock, and believe a wage-price spiral will be avoided.

At the same time, after aggressive rate hikes in 2022 and 2023, we may be nearing the end of current monetary tightening measures. Inflation is not falling as fast as many central bankers wish, which means rate cuts are unlikely this year in major advanced economies. But additional hikes risk a further rise in business bankruptcies..

Finally, there is a growing risk of de-globalisation, with tensions between China and the US heightened by China’s support of Russia. The EU has also become more suspicious of Chinese motives. Our forecast model assumes that a meaningful thawing of relations is unlikely, but so too is a significant decoupling of major economies.

The takeaway

The hopeful message from this forecast is that 2023 is likely to be a better year for growth than might have been expected in January. China’s reopening and the resilience of Western economies to energy price shocks are reasons for cautious optimism.

Next year is likely to be more of the same, with subdued GDP growth and a slight improvement in global trade.

The caveat is that these forecasts depend on a gradual and consistent fall in inflation, alongside plateauing interest rates. At the moment, these seem like reasonable assumptions.