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Economic Update - Outlook for 2023
What general economic trends are on the horizon in 2023? Cailin Birch, global economist at the Economist Intelligence Unit, shared her thoughts.
The global economic context
The war in Ukraine
To a certain extent, the global economy is now through the worst first-round impacts of the war in Ukraine.
The Economist Intelligence Unit’s commodity price forecasts have hit something of a peak in 2022. Nonetheless, prices will likely remain relatively high going into 2023 and feed into inflation for a good while into the future.
Central banks have to decide how to respond to these unfamiliar economic conditions. In all major economies that drive growth, consumer price inflation is now approaching 10%. Policy interest rates have risen sharply as a result, and will likely stay high at least until the end of 2024.
Are we headed for a global recession?
Russia and Ukraine will feel most of the global economic hit, with the EU being the next most seriously affected. The Economist Intelligence Unit has downgraded its growth forecasts for the euro area and most G20 countries, although many Middle Eastern, African and Latin American countries are faring relatively well.
A global recession is unlikely in 2022, but more probable in 2023. The US, Germany, Italy, France and the UK will enter into a modest recession over the course of the next six to eight months.
Growth will likely fall to 1.7% globally, mainly driven by a slowdown in the US and China. 2023 will see a gradual righting of the ship, although several key risks remain:
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An escalation of the war in Ukraine
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The emergence of a new Covid variant
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Spikes in energy prices
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Sovereign debt pile-ups
Clearly, the more benign environment that existed before 2018 has now disappeared. This has largely been driven by changes in geopolitics, as well as the end of the era of ultra-low interest rates and large debt pile-ups.
Trade and supply chain trends
Geopolitics
Since the start of the war in Ukraine, Russia and China have started to forge closer political and economic ties. With few other alternatives, Russia will come to rely on China for trade, and this situation will endure for several years.
This in turn will mean a significant reshuffling of global supply chains and prices: Russia is a major producer of not just energy, but fertilisers, gold and other metals like nickel.
This relationship will be unbalanced, however: China seeks to avoid overreliance on any market.
Alternative payment systems like CIPS will become more important in the coming years, as will digital currencies.
When will economic conditions return to normal?
Ongoing disruption to supply chains coupled with a broader economic slowdown will lead to a steep deceleration in trade. Nonetheless, global supply chain patterns will start to normalise again by 2023.
Freight rates – the costs of shipping goods around the world – are starting to ease back towards their 2021 peak.
The ‘semiconductor crunch’ will continue well into 2023, meaning raised costs for electronic goods which will fuel concerns about inflation. There will be a gradual improvement as the year goes on, however.
As for reshoring, it seems unlikely that large-scale industrial production will return to Western countries or leave China. The FDI differential will start to narrow and investment will more likely be diverted to other countries in Asia.
Looking to the future: two main risks
Two main factors risk disrupting future economic forecasts, the first being a deterioration in relations between the US and China over Taiwan.
Not much is likely to change in 2023, but the upcoming election in 2024 may lead to a Taiwanese government with greater desire for independence. Any potential conflict arising from this would force a decoupling of US and Chinese markets, with countries and companies forced to choose between the two.
The arrival of winter also brings its own economic challenges. A colder winter with higher heating demand will have negative impacts on industrial production. Reduced economic output means that European countries risk losing their footing on global supply chains, depending on how deep and long-lasting the energy crisis is.
Over the course of a typical winter, European gas storage tends to decline by about 60%, normally ending up at 20%. With supplies under pressure, European countries will need to make sure they buy 20% more than usual in order to be sure that stocks will last. This will be both complicated and expensive and could lead to similar problems in the winter of 2023-2024.