Spring 2023

15 reasons for guarded optimism on outlook

Give two and a half cheers for the world economy, writes David Marsh, chairman, OMFIF.

Let’s give two and a half (muted) cheers for the world economy. The International Monetary Fund has upgraded its 2023 forecasts. Economies have been adjusting to Russia’s war in Ukraine. What could possibly go wrong? Quite a lot.

But here are 15 reasons for guarded optimism about the political and economic outlook.

    1. Inflation is falling. The pace is slower than most central bankers and private sector economists misguidedly predicted when the post-Covid-19 spike first became apparent in spring 2021, but faster than seemed likely in the second half of 2022.
    1. Warmer weather restraining the rise in northern hemisphere winter energy prices has been helpful, as has the lack of aggressive wage rises, partly reflecting massive government financial cushioning of unfavourable effects on incomes.
    1. Central banks collectively realised in summer 2022 they would suffer long-term credibility damage unless they caught up with overdue tightening. So far, their balancing act has worked reasonably well.
    1. The balance of tightening has rightly moved towards the previously laggard European Central Bank, away from the Federal Reserve, which was slow off the mark but still the first mover. Christine Lagarde, ECB president, who as late as November 2021 said 2022 interest rate rises were very unlikely, seems to be enjoying her role as a hawk. We will see how long that lasts.
    1. The US is the locomotive of the world economy. Taking that mantle from China is no bad thing. However raw the discourse, American decisions end up a lot saner than in most other places. US financial, technological and monetary leadership may be a clinching factor in the war – just as with the late 1980s ‘strategic defence initiative’ against the Soviet Union. The chances of Donald Trump returning to the White House, although not zero, have diminished.
    1. The war may be moving gradually towards some kind of internationally guaranteed settlement later this year – assuming the US Congress constrains President Volodymr Zelenskyy’s ability to gain endless funds for the impossible objective of reconquering Crimea. Ukraine’s battlefield prowess, its citizens’ resilience, the West’s determined response and President Vladimir Putin’s strategic errors may produce an appropriate background. However, in wars, Russia normally makes mistakes and then learns from them.
    1. Germany has bowed to pressure to supply Leopard-2 tanks, vital in any spring offensive by either side. Chancellor Olaf Scholz has done well in bringing in as defence minister Boris Pistorius – no-nonsense former Lower Saxony interior minister – to replace the never-up-to-the-job Christine Lambrecht.
    1. China is opening up its economy after the collapse of the ‘zero Covid’ policy. President Xi Jinping has sensibly decided to take the line of least resistance, fearing massive protests and economic stagnation after more than 1m pandemic deaths and loss of face from his U-turn.
    1. Forecasts that China would emerge as the long-term winner still contain some plausibility, but this looks less likely than in the early stages of the conflict. Putin was hoping for more vigorous Chinese support. China wishes to back the victors and is unsure if that will include the Russian president.
    1. China may now be more open to looking for friends in the West. Given the incompatibility of Ukraine’s and Russia’s ambitions, an understanding between the US and China – proxy warriors in the conflict – will be vital.
    1. Despite the share price surge in fossil fuel companies, the outlook for renewable energy development has never been better. Europe, the US and China badly need to broker a deal on accelerating projects in developing countries. This can only happen if the Ukraine war ends.
    1. European cohesion remains in place, despite all the strains. Germany and France have yet again papered over cracks. Germany has played both national and European cards, using its strong national balance sheet – still in German hands despite the euro – to shepherd the country through the end of Russian gas supplies, with positive results elsewhere on the continent.
    1. The new Italian government of Giorgia Meloni has been behaving itself. The anti-Covid Next Generation EU fund is starting to work through to Italy, with a favourable effect on government finances offsetting the fall in Eurosystem government bond purchases.
    1. Britain has awoken from the post-European Union referendum dreamworld. Painful but salutary. It will be the only G7 country with a 2023 gross domestic product contraction, the IMF says. The bursting of illusions that the UK can conduct economic life by a different set of rules to everyone else is universally helpful.
    1. Successive Conservative governments’ incompetence and malfeasance look likely to bring Labour into power in 2024. Uncertainty could hit sterling. The good news is that the likelihood of a return to power by Boris Johnson, a former prime minister, is even lower than Trump’s in the US.

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