In October, the International Monetary Fund (IMF) cut growth forecasts for 2023, as fears of a recession loomed large. According to the IMF, economic growth will slow from 3.2% to 2.7% next year.
The Paris-based Organization for Economic Cooperation and Development (OECD) echoed the same sentiment when it predicted that 2023 will see economic growth hovering around 2.2%, as biting inflation, geopolitical issues, and high interest rates leave little wiggle room. The predictions are not set in stone but some analysts fear that the global economy might slip below 2%.
The IMF Forecast and World Economy
The IMF anticipates that global inflation will peak in late 2022, increasing from 4.7% in 2021 to 8.8% and that will remain that way for a while. The agency noted that central banks across the globe have tightened monetary policies to fight high inflation and steady economies.
China’s covid restrictions and lockdowns have affected global supply chains and economies. In its Global Financial Stability Report, the IMF wrote “The global environment is fragile with storm clouds on the horizon.”
The report acknowledges that policy makers are struggling with an unprecedented crisis and it has affected growth forecasts for major economies. The IMF admitted that financial markets are showing signs of stress as fiscal policies remain unpredictable. In a discussion, in October, IMF Managing Director Kristalina Georgieva said that things will get worse before they improve.
The energy crisis has also impacted economies across Europe, and the effects will be seen for a long time. “Winter 2022 will be challenging for Europe, but winter 2023 will likely be worse,” the IMF said.
Analyst Predictions
Barclays expects developed economies to contract across 2023, with the UK and Eurozone experiencing recessions. It expects the weakest growth in four decades, as inflation soars on the back of Russia’s invasion of Ukraine.
According to Goldman Sachs, economies will see below-potential growth and labor market rebalancing in 2023. In its 2023 US Economic Outlook report, the financial services firm stated that inflationary overheating can be reversed without a recession. But for this to take place, the labor market must cool down and wage growth must come down.
Europe’s energy crisis is expected to worsen its reliance on Russian gas has left it cold. Rising gas and energy prices have crippled much of Europe’s industry and policy makers have criticized Germany for over-reliance on Russia. Europe could see a recession in the coming months.
Meanwhile, investment firm Morgan Stanley believes that global inflation will peak in the fourth quarter of 2022. As discounts to clear off inventories and a slowdown in the housing market will help temper inflation, central banks will be forced to reevaluate fiscal policies. Seth B Carpenter, Morgan Stanley’s Chief Global Economist, said that he is hopeful “as consumer goods’ supply chains recover and labor markets see less friction, we could see a sharper and broader fall in inflation, which would imply a somewhat easier path for policy and higher growth globally.”
OECD Secretary-General Mathias Cormann acknowledged that inflation has become persistent and broad-based, affecting “real household incomes across many countries have weakened despite support measures that many governments have been rolling out.” The OECD is of the opinion that the US will grow by 1.8% in 2022, 0.5% in 2023, and 1% in 2024.
Analysts predict that the Fed interest rate hikes will make it difficult for heavily indebted governments, businesses and consumers to pay their bills.
In the labor market, Morgan Stanley believes that by 2023 companies will have slowed hiring and find it difficult to fill laid off positions. They are of the opinion that Asia will have a relatively upbeat outlook as China, Japan, and India will mostly lead the way. Improving supply chains and tech infrastructure in these regions could help emerging markets break out of a cycle dominated by the strength of the US dollar.
