Economic crisis is likely to continue in 2023

The global economic outlook for 2023 is bad. Global growth will be low, even perhaps recessionary, and average inflation and unemployment high. But just how bad will it be? The answer isn’t clear. One might have hoped questions permeating the post-pandemic outlook would recede.

However, that does not appear to be the case for 2023, even apart from geopolitics. Answers remain few and far between. Markets and policy-makers face huge challenges.

The prospect of recession may loom over the global economy today, but the rich world’s difficulties over growth are graver still. The long-run rate of growth has dwindled alarmingly, contributing to problems including stagnant living standards and fulminating populists. Between 1980 and 2000, gdp per person grew at an annual rate of 2.25 per cent on average.

Since then the pace of growth has sunk to about 1.1 per cent. These are difficult times. In America the Federal Reserve is battling inflation of more than 8 per cent with rapid interest-rate rises. In some European economies price pressures are stronger still, because of the energy-price crunch caused by Russia’s war in Ukraine. Chinese manufacturers are struggling with zero-Covid policies and a property-market bust. Conditions are likely to get worse before they get better. But how much worse? Read our coverage below to understand what is going on, why, and what may happen next. Vladimir Putin’s invasion of Ukraine has led to the biggest land war in Europe since 1945, the most serious risk of nuclear escalation since the Cuban missile crisis and the most far-reaching sanctions regime since the 1930s.

Soaring food and energy costs have fuelled the highest rates of inflation since the 1980s in many countries and the biggest macroeconomic challenge in the modern era of central banking. Assumptions that have held for decades that borders should be inviolable, nuclear weapons won’t be used, inflation will be low and the lights in rich countries will stay on have all been simultaneously shaken. Three shocks have combined to cause this turmoil. The biggest is geopolitical. The American-led post-war world order is being challenged, most obviously by Mr Putin, and most profoundly by the persistently worsening relationship between America and Xi Jinping’s China. The resolve with which America and European countries responded to Russia’s aggression may have revitalised the idea of the West, particularly the transatlantic alliance. But it has widened the gap between the West and the rest.

The majority of people in the world live in countries that do not support Western sanctions on Russia. Mr Xi openly rejects the universal values upon which the Western order is based. Economic decoupling between the world’s two biggest economies is becoming a reality; a Chinese invasion of Taiwan is no longer implausible. Cracks are also appearing in other longstanding geopolitical certainties. Bangladesh’s economic miracle is under severe strain as fuel price hikes amplify public frustrations over rising costs for food and other necessities. Fierce opposition criticism and small street protests have erupted in recent weeks, adding to pressures on the government of Prime Minister Sheikh Hasina, which has sought help from the International Monetary Fund to safeguard the country’s finances.

Experts say Bangladesh’s predicament is nowhere nearly as severe as Sri Lanka’s, where months’ long unrest led its president to flee the country and people are enduring outright shortages of food, fuel, and medicines, spending days in queues for essentials. But it faces similar troubles: excessive spending on ambitious development projects, public anger over corruption and cronyism, and a weakening trade balance. Such trends are undermining Bangladesh’s impressive progress, fueled largely by its success as a garment manufacturing hub, toward becoming a more affluent, middle-income country. Expects the euro area economy to contract 0.2 per cent in 2023 on the back of the ongoing energy crisis and tightening monetary policy. Inflation—which surged to an unprecedented annual rate of 10.7 per cent in October 2022 is expected to remain well above target for the remainder of 2022 as well as 2023. We think the European Central Back, driven by inflation concerns, will hike rates to 2.5 per cent in the first quarter of 2023 before it begins cutting rates in early 2024, says Jens Eisenschmidt, Chief Europe Economist. Morgan Stanley predicts GDP in the euro region will post 0.9 per cent GDP growth in 2024, compared with the consensus estimate of 1.6 per cent. On the positive side, the region’s unemployment is at a record 6.6 per cent low, employment and hours worked are above late 2019 levels and labor market participation is higher than it was before the energy crisis. Although labor markets may weaken, the increase in unemployment may be modest. Meanwhile, the U.K. economy grew 7.5 per cent and estimated 4.2 per cent in 2021 and 2022 respectively. Now, largely because of double-digit inflation, that’s slated to decline -1.5 per cent in 2023, the greatest economic deceleration of any major economy, except for Russia.

The Bank of England is thus likely to end its rate hikes at 4 per cent and follow the Fed in cutting in early 2024.The ongoing hit to real disposable income will continue to weigh on consumer spending, with elevated economic uncertainty prompting people to hold onto their savings, says Chief U.K. Economist Bruna Skarica. Additionally, a spike in mortgages rates will likely cause a sharp decline in sales of residential real estate. Asia’s outlook for the year ahead is relatively upbeat, with three of the world’s largest economies helping to lead the way. Here’s a look at what’s ahead in the region: In China, recovering private consumption could lead the economy to a modest recovery next year. We’re forecasting 5 per cent growth in 2023, with most of that coming in the second half of the year, when the economy is expected to fully reopen following the repeal of Covid-zero policies early in the year, says Chief China Economist Robin Xing. This represents a significant improvement on our forecast of 3.2 per cent growth for China in 2022, which is a sharp decline relative to average growth over the last decade. In Japan, a well-developed economy and aging population have kept growth relatively tame even in the best global macro environ- ments. To that end, Morgan Stanley’s forecast of 1.2 per cent GDP growth for 2023 is a positive, despite being below consensus. Households have significant excess cash and deposits that should support growth next year, says Chief Japan Economist Takeshi Yamaguchi. In India, the real outlier, GDP is on track to expand 6.2 per cent in 2023 and 6.4 per cent in 2024, while three megatrends, underpinned by the country’s advanced digital infrastructure, are putting India on a path to surpass Japan and Germany and become the world’s third-largest economy by 2027.

The writer is a researcher based in the UK. He can be contacted at raihan567@yahoo.com