Here’s what could tip the global economy into recession in 2023


The global economy has gone through a difficult year, with decades-high inflation undermining post-lockdown spending and pushing central banks to raise borrowing costs at an unprecedented rate to get them under control.

Their campaign to manage prices may work – but potentially at considerable cost in 2023.

“It is likely that the global economy will face a recession next year as interest rates rise in response to higher inflation,” Kay Daniel Neufeld, director and chief forecasting officer, said this week. at the Center for Economics and Business Research. .

Not everyone agrees that the global economy is heading into a recession. Yet, with growth expected to decline further after a sharp slowdown in 2022, It’s a possibility.

The International Monetary Fund forecast in October that global growth would fall to 2.7% in 2023. Barring the global financial crisis and the worst stage of the pandemic, it would be the weakest year for the global economy since 2001.

In November, the group warned that the outlook had become even “gloomier” since the forecast was released.

Whether a global recession materializes may depend on three factors: what central banks do next, the consequences of China’s nascent reopening, and energy prices. Here’s how each of these variables could dictate the year ahead.

The IMF has called inflation “the most immediate threat to current and future prosperity.” And while it has started to fall in the United States and Europe as energy prices fall and higher interest rates ripple through the economy, central banks have made it clear that they have no intend to stop rising soon, although they are more comfortable with lower increases.

“We are not pivoting,” European Central Bank President Christine Lagarde said earlier this month. “We don’t hesitate.”

Central bankers operate on a meeting-by-meeting basis when analyzing the latest data. They stressed that they don’t know how far they will have to raise rates, or how long they will have to hold them, in order to bring inflation down to near 2% and keep it there. If prices continue to rise more than they would like, central banks could be more aggressive than expected, putting additional pressure on the global economy.

“We think we will have to maintain a tight policy for some time,” U.S. Federal Reserve Chairman Jerome Powell said after the central bank’s December meeting.

For nearly three years, the Chinese government has limited the spread of Covid-19 using centralized quarantines, mass testing and rigorous contact tracing. Now, following protests across the country against the strict restrictions, he is abruptly reversing those measures.

The impending reopening of the world’s second largest economy could boost growth. But it also carries risks.

“China’s current depressed state suggests there is significant potential for improvement,” Bruce Kasman, head of economics and policy research at JPMorgan Chase, said earlier this month. “However, recent experience also shows that major setbacks normally occur when overtures are premature and health systems are overwhelmed.”

A wave of coronavirus infections is currently sweeping China, but so far Beijing is pushing ahead with plans to ease its rules. This week it announced it would drop quarantine requirements for international arrivals from early January in a major step towards reopening its borders. Other countries, meanwhile, are imposing restrictions on travelers from China, fearing the development of new variants.

Russian President Vladimir Putin’s war in Ukraine continues to add uncertainty to the forecast, especially for countries in Europe, which are weaning themselves off Russian energy but could still face shortages.

A report by the International Energy Agency found that Europe could face a shortage of natural gas in 2023 if Russia halts all gas exports to the region and the weather turns cold.

Another wild card: the potential rise in China’s energy demand as its economy recovers.

“They are related,” said Diane Swonk, chief economist at KPMG. “One of the reasons why energy prices [lower] it is because China is exceptionally weak.

The Organization for Economic Co-operation and Development said its latest round of economic projections may need revisions if energy supply shortages push prices even higher, or if European governments have to implement rationing to reduce demand for energy. gas and electricity. this winter and the next.

Whether the world falls into recession or not, the next 12 months are likely to be difficult.

“It remains a difficult environment,” said Guillaume Menuet, head of investment strategy and economics for Citi Private Bank in Europe, the Middle East and Africa.

His team predicts that the world will experience the slowest economic growth in 40 years, outside of 2020 and the financial crisis of 2007-2008.

Even if a global recession is averted, many countries could still experience downturns accompanied by painful increases in unemployment, although economists disagree on the severity and duration of these downturns.

“The worst is yet to come, and for many people, 2023 will look like a recession,” the IMF said in October, noting that the downturn “will be broad-based” and could “reopen economic wounds that have only been partially healed after the pandemic”. .”

Author: niso

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