Global Economic Outlook 2023

458
Rashid Ahmed Mughal, USA

Challenges and upheavals witnessed by the World during the last three years, mostly due to Covid19 and climate change and other ongoing issues, are unprecedented. Every country from Australia to America and from Canada to Chad has seen trying times.

The after-effects of Covid19 still persist, giving rise to new economic turmoil and political instability. Sky-rocketing inflation and supply line nightmares coupled with uncontrollable prices of essential food items are the issues that are making people and leaders equally pass sleepless nights in every country of the World. How is every region facing and tackling these challenges and with what results is a million-dollar question.

Asian Region

Recovery is expected in Asia’s economic growth as industrial activity and services reactivate and consumption rebounds. Thanks to a relaxation of COVID-19-related restrictions and the reopening of borders in many countries—with the notable exception of China. GDP growth in the region is expected to soften gradually over a period of 2024–35, though it will remain above the global average.

Developing Asia will be the main driver of regional growth. There is a caveat, however: downside risks are rising due to a slowdown in external demand, rising inflationary pressures and the deterioration of the geopolitical environment due to war in Ukraine and other conflicts in the region and outside.

Demand will be sluggish due to the economic crunch in the West and the supply of raw material. However, with a strong rebound early this year, Asia’s economy is expected to continue its recovery path into 2023, mainly driven by a relaxation of COVID-19-related restrictions and continued recovery in consumption.

But the region is also facing mounting headwinds, and businesses should prepare for continued disruption in the years ahead. Geopolitical volatility is rising, affecting energy and food security as well as global supply chains.

Asia’s economic prospects are expected to soften gradually over our long-term forecast period (2024–35). Developing economies in Asia will have relatively higher growth potential than developed ones thanks to rising domestic demand and continued improvement in technology and human capital.

Facing these challenges, many Asian nations are increasing the role of their domestic markets in driving overall growth and shifting the focus of their export industries to markets closer to home.

Eurozone

Recession in the Short Term Gives Way to Weaker Growth in the Longer Term. Russia’s unjustified war in Ukraine has sharply deteriorated the European economic outlook for 2022 and 2023. Soaring energy prices pushing overall inflation to double digits, plummeted consumer confidence, and dented business activity amid reduced demand are likely to tip the Euro Area economy into recession by the end of 2022. More recently, the ECB’s decision to tighten its monetary policy has increased downside risks to the region’s growth prospects. Decades of declining defense budgets have led to a dramatic downsizing of European armed forces and generated major capability gaps. Competing national defense industries and diverging operational needs have also resulted in a deeply fragmented defense landscape where cooperative solutions are an exception, not the rule. Finally, endless debates on the need for, or the danger of, more European strategic autonomy have slowed down European ambitions and are still vivid today in the context of the war in Ukraine. Having a clear understanding of these limitations is critical as Europeans think about the future of their defense.

Despite the myriad of headwinds faced by the European economy, the recession may be relatively shallow and short-lived, given a strong and resilient labor market and the relatively healthy balance sheets on the part of consumers and businesses.

Beyond 2024, the economy is likely to return to its slowing trend growth rate trajectory. Key risks around the longer-term outlook are internal tensions regarding the Euro Area architecture with slow growth in Italy and Spain and a more challenging global environment both through shrinking foreign demand and overall geopolitical tensions, particularly on its eastern flank.

Businesses should prepare for continued volatility, as the energy crunch is unlikely to abate soon and will eventually lead to slower growth over 2023. Reducing electricity and gas usage, investing in renewable energy and infrastructure, and improving energy efficiency and security (e.g., using on-site energy generation systems) can improve not only their overall environmental but financial performance too.

A recession may be inevitable but does not need to be deep and extremely damaging. Businesses should prepare for future growth, particularly as the energy transition evolves and supply chain disruptions eventually fade. Innovating their way out of the crisis, prioritizing supply chain resilience and sustainability, and enhancing their investment strategies toward greener solutions are key drivers of business growth and overall economic prosperity in the years ahead.

Business leaders need to adjust to a changing Euro Area labor market. More flexible working arrangements, reskilling/upskilling opportunities to boost workers’ productivity, and a focus on the recruitment, retention, and retraining of older workers will be essential for business leaders operating in the Euro Area.

Even if income growth in the Euro Area is expected to underperform the global average, the Euro Area remains a large consumer market. The region accounts for about 10 percent of global spending on goods and services (in purchasing power parity terms), a share that is only slowly decreasing.

China

Current Property Market Downtrend Redirects the Economic Outlook in the Coming Decade

While we expect China’s long-term growth to continue outpacing growth in advanced economies, risks are tilted to the downside. Domestically, the country’s property downturn will not only affect industrial activity, but also erode households’ wealth levels and, therefore, exacerbate downward pressures on domestic demand. Externally, the rising tension between Western nations and China could severely damage the growth outlook for China’s high-tech sectors. These factors will weigh on China’s already falling aggregate rate of return on capital. China’s GDP is forecast to rebound to above 5 percent in 2023, assuming the government relaxes its “dynamic zero-COVID” strategy next year. Industrial production growth will slow down in 2023 as external demand moderates.

China’s aging population and the slowdown in capital accumulation will lead to further growth deceleration in the coming decade. The downturn of the housing sector is likely to last for years, affecting China’s medium- to long-term growth through several fundamental channels.

Investment growth in manufacturing will rally in industries where businesses consolidate as well as those with strong state support. While the energy crunch in the past two years has resulted in increasing reliance on coal, the government is not retracting its long-term decarburization plan.

United States of America

Imminent US Recession to Be Followed by Slower Economic Growth

The economic outlook for the United States for 2023 has deteriorated under the weight of high inflation rates and rapid monetary tightening. Falling consumer and business confidence, softening consumption and investment, and geopolitics-induced energy shocks are likely to tip the economy into recession around the turn of the year. However, the recession is projected to be short and mild, amid a strong labour market and relatively healthy consumer and business balance sheets.

Beyond 2024, the US economy is likely to return to its slowing trend growth rate trajectory. Key risks around the longer-term US outlook are related to geopolitical frictions, environmental challenges, labor markets, and inflation. The US economy may go into a recession as we enter 2023. Following a large drop in US gross GDP in 2020 due to the impact of the COVID-19 pandemic, the US economy experienced rapid growth for much of 2021. However, in 2022 this growth momentum began to sputter.

Inflation is expected to remain above pre-pandemic trends for several years, if not longer. The US economy is currently grappling with a wave of high inflation driven by a confluence of supply and demand factors that are not expected to resolve quickly. Interest rates are not likely to fall until 2024 or later. As a function of inflation, the Federal Reserve has rapidly tightened monetary policy and will continue to raise rates into early 2023. Following the expectation of near-zero growth in 2023, US real GDP growth is likely to recover in 2024. However, over the next decade, growth will be somewhat muted relative to pre-pandemic trends.

Disruptions brought about by the pandemic will have lasting effects on the drivers of US growth ahead and there will be smaller contributions from labor, reflecting an aging demographic. Nonetheless, the acceleration of digital transformation resulting from the pandemic and current investment in infrastructure is likely to result in elevated total factor productivity (TFP) growth over the next decade.

Russia

According to some thinkers, the Western sanctions that followed the invasion of Ukraine have made it impossible for Russia to import what it needs. Foreign investors are staying away, thousands of the country’s elite have emigrated, and the price of its main export has sunk. President Vladimir Putin’s war has isolated his country. The great shut-off of its economy will accelerate in 2023, as Moscow moves closer to the North Korean economic model.

The invasion of Ukraine has inflicted damage on Russia, which depends heavily on the export of oil and gas. Though high prices in early 2022 helped the country, the rest of the world quickly adjusted, moving around supplies and, in some cases like the United States, exporting more. The price of Russia’s Urals crude oil has already fallen 40% from its March 2022 peak, and Russia could now lack the resources to cushion the blow of the recession on its population.

As a result, the Russian economy will take a hit. In October 2021, the International Monetary Fund predicted Russia’s economy would grow by 2% in 2023. Now, the agency sees the country’s GDP falling by 2.4% after shrinking by 3% in 2022. Based on the rouble’s 2021 exchange rate, that translates into some $200 billion in lost GDP.

That will add pain to already worsening finances. Spending jumped more than 20% in 2022 mostly because of an increase in defence outlays estimated at some $53 billion by Bank of Finland economists. The Russian government had to raid a rainy-day fund to make up for the first budget deficit in years. Keeping the Ruble convertible into other currencies will become harder by the month.

Putin has already tightened his and his government’s control of the economy, demanding to sign off on the sale of assets by Western companies in the banking or energy sector. State-owned companies or banks, or Kremlin-friendly oligarchs, such as nickel magnate Vladimir Potanin, have already bought banking or industrial assets very cheap, and the trend will only intensify.

Far from the scrutiny of foreign investors, Russian businesses will be free to take to new levels the widespread corruption that has held back the economy for years. And Putin can complete his task of devising a regime where nobody can replace him, with oil it can’t sell and Rubles it can’t use.

— The writer is a former Civil Servant and Consultant: I.L.O and I.O.M