13.04.23 Review

Europe and the US to Avoid Recessions, but Global Economic Growth to Remain Subdued

Over the next few years, global economic growth will slow down. Although the most pessimistic predictions made last year have not come to fruition, the risks of slow economic growth remain, as do the prerequisites for an economic downturn. As a result of the challenges currently faced by banks in the US and Europe, The International Monetary Fund has downgraded its forecast for 2023. Although a full-scale financial crisis is unlikely to happen, the need to bail out struggling banks will complicate efforts to combat inflation. The only country expected to experience economic growth in 2023 is China, and that is largely the result of the removal of its zero-COVID policy at last. India is also anticipated to have a high growth rate. Although forecasts for Russia’s economy have seen improvement with each quarter, they still fall within the range of -0.8% to +0.8% of GDP, with this growth largely driven by government expenditure on both the war and on countering international sanctions. However, a great deal depends on how much Russia is able to earn from its energy trade. Among the world’s major economies, the United Kingdom is the only country expected to experience a decline in its GDP in 2023, as a result of the particularly acute problem of inflation.

The latest forecast from the International Monetary Fund (IMF) suggests that the global economy may grow by 2.8% in 2023 and 3% in 2024. This is a decline from growth of 3.4% in 2022 and 5.9% in 2021. Experts from the IMF have made slight adjustments to their projections based on the results from the first quarter. In January, they had predicted growth of 2.9% for 2023 and 3.1% for 2024. The Peterson Institute for International Economics (PIIE) is now offering a similar forecast and predicting a similar rate of growth.

Global GDP growth has been weakened as a result of high interest rates in advanced economies.  Regulators such as the US Federal Reserve and the European Central Bank have been forced to implement these to fight inflation. Inflation levels in 2022 were the highest they have been in decades — a consequence of the rapid recovery of global GDP after the pandemic. Developed countries had been intensively financing their economies in order to mitigate the effects of lockdowns. The sharp rise in commodity prices following Russia's invasion of Ukraine exacerbated the situation further, forcing regulators to tighten their credit policies by increasing interest rates even higher. Last summer, the US experienced inflation in excess of 9% for the first time in over 40 years. Historically, whenever inflation in the US exceeds 5%, the Fed raises rates above this level to curb a further rise. This ultimately results in a recession. Therefore, the fear of an impending recession in the world's largest economy (and then in Europe) was one of the primary economic concerns of 2022. However, recent statistics suggest that a recession is likely to be avoided, as many economies, including Europe, which has been particularly hard hit by the energy war with Russia, have proved to be more resilient than previously expected. Thus, the current low forecasts for global GDP growth are considered to be a positive scenario, as the situation could have been much worse.

Issues within the financial sector are the main reason for the downgrading of the IMF’s forecast for growth. In the US, Silicon Valley Bank and Signature Bank unexpectedly went bankrupt in the spring, while in Europe, the giant Credit Suisse collapsed. The need to bail out the financial sector complicates the fight against inflation, as it requires a tightening of fiscal policy, while countering the financial crisis requires its easing. According to the latest IMF forecast, global inflation in 2023 will be 7%, compared to 8.7% in 2022. In January, experts from the IMF had published a more optimistic forecast of 6.6%. However, IMF Chief Economist Pierre-Olivier Gourinchas has stressed that we are yet to witness a full-scale financial crisis, ‘even if new financial shocks are unavoidable.’

Despite forecasting a significant slowdown in the growth of the global economy, the IMF and the Peterson Institute paint a more optimistic picture than the World Bank. Currently, experts from the World Bank are predicting a slowdown of growth to 2%; in January, they were forecasting a rate of 1.7% (the worst rate of the last three decades, excluding the global recessions of 2009 and 2020). The reason for this improvement to the World Bank’s forecast is renewed optimism regarding China’s economic growth. However, the World Bank experts also predict that the global economy will ‘lose a decade’ with an average growth rate of 2.2% per year until 2030. Over the last two decades, global GDP has grown on average one-third times faster than this. For the world’s emerging economies, growth rates are expected to decline from 6% per year between 2000 and 2010 to 4% per year for the remainder of this decade.

Chief Economist at the World Bank Indermit Gill has warned that this persistent slowdown of economic growth will have serious implications for the ability to address global challenges such as poverty, inequality, and climate change.

According to experts, the overall deceleration of growth this year can largely be attributed to the challenges faced by developed economies. As per the IMF forecast, the GDP of this group of nations is expected to increase by 1.3% in 2023, which is 1 percentage point higher than their forecast last January. Although 2022 was considered a particularly difficult year, growth stood at 2.7%, which is evidence that this level of growth will still be insufficient.

According to the IMF’s forecast, in 2023 GDP growth in the Eurozone may reach 0.8%, which is lower than 2022’s rate of 1.4%. The situation is even worse in the United Kingdom. The UK’s GDP is expected to decline by 0.3% after a growth of just 1%. The Peterson Institute provides similar estimates, forecasting Eurozone GDP growth of 0.7% and a contraction 0.1% in the UK. Nevertheless, Europe appears to be more resilient than it had seemed a few months ago, and the Eurozone is expected to be able to avoid a recession.

Experts predict that the Federal Reserve in the US will need to implement several more rounds of interest rate hikes before inflation is brought down to target level. Nevertheless, a recession in the US no longer seems to be the most likely scenario. Recent labour market data has inspired some cautious optimism. According to the Peterson Institute forecast, US GDP growth in 2023 may reach 1.3% (compared to 2.1% in 2022 and 5.9% in 2021), followed by a growth of 1% in 2024.

There is no clear observable trend or pattern among emerging economies. According to the IMF forecast, the GDP of these countries will increase by 3.9% in 2023, which is slightly lower than the 4% growth projected in January.

Unless China reverses its decision to lift most of its COVID restrictions and as long as its real estate crisis does not spiral out of control, it has the potential to experience stronger growth in 2023 and 2024 than it did in 2022. China is currently growing faster than the IMF had expected at the beginning of the year. The IMF forecast for 2023 is 5.8%, following growth of 3% in 2022 and an impressive rate of 8.1% in 2021. According to the Peterson Institute's forecast, China's GDP will grow by 5.5% in 2023.

India’s economic reforms, particularly significant public investment in the development of transportation infrastructure, may help to stimulate stronger growth relative to other major economies in 2023. The IMF forecasts an increase of 5.9%, and this number stands at 6% according to the Peterson Institute's forecast.

The IMF has raised its expectations for Russia's GDP in 2023 from a growth of 0.3% to 0.7%, and they expect a  growth of 1.3% in 2024 (January’s forecast projected growth of 2.1%). The unexpected growth of the Russian economy will most likely occur as a result of government spending, primarily related to the ongoing war in Ukraine. However, other experts have made less optimistic predictions. The Peterson Institute predicts a 2% decline in GDP in 2023, with 1% growth in 2024, while the World Bank expects this decline to be limited to 0.2% in 2023 (in the previous version of their forecast this predicted decline was around 3.3%), followed by growth of 1.2% in 2024 and 0.8% in 2025. The Russian Ministry of Economic Development has forecast a decline of 0.8% in 2023. However, it should be noted that there remains a high degree of uncertainty which highly affects the accuracy of long-term forecasts for the  Russian economy due to the ongoing war in Ukraine and a lack of transparency when it comes to statistics published by the authorities. The Russian economy is heavily reliant on its revenues from energy exports, and declining export earnings may create significant challenges for the prospects of the country's economy. Despite this, strong import figures suggest that the Russian economy is currently managing to weather the effects of last year's sanctions.