The global economic outlook for 2023 has faced multiple mood swings. Another might now be in the offing. Spring projections are likely to start trending upwards. But the path forward faces major uncertainties. Forecasters are hardly to be envied.
Last autumn, gloom pervaded projections, with a global outlook weighed down by rising inflation, concerns over the continued pass-through from energy price hikes, rising interest rates, geopolitical fallout from Russia’s barbaric invasion of Ukraine and widespread near-term recession fears.
By January, modest optimism crept in because the worst was over, though the outlook was hardly upbeat. China had begun reopening, energy prices were down, winter temperatures were mild, energy inventories were holding up and inflation was peaking.
Figure 1. Global growth forecasts show modest optimism in January
Source: International Monetary Fund World Economic Outlooks
While overall spring growth estimates are likely to be boosted a bit, recent developments may set in motion another mood swing. Critical conundrums are facing the largest economies and there are questions about how to gauge the uncertainties permeating the outlook.
In the US, stronger than expected consumer price data this year hit markets somewhat less concerned about inflation after several months of moderation. Strong payroll data painted a picture of far greater labour market strength than previously anticipated. These developments abruptly reversed last autumn’s downturn in short- and longer-term rates and easing in financial conditions, lifted expectations of the Federal Reserve’s terminal rate from roughly 5% to 5.5% and dashed market expectations of Fed 2023 rate cuts.
But in the last week, given the enormous market turmoil set off by developments at Silicon Valley Bank followed by Credit Suisse, growth may be set back and markets are dialling way back on terminal rate expectations. How this plays out fully is yet to be seen.
Juxtaposed against these latest market developments, there is now widespread questioning about how much progress is actually being made in reducing core inflation and how biting prior Fed hikes are, as well as rising doubts about the Fed’s ability to bring inflation down to 2% in the near future without significant pain. Forecasters seem even more inclined to expect a US recession but, prior to the collapse of SVB, the timing increasingly was being put off till the end of 2023 or 2024. Meanwhile, others were wondering if the US economy would face a Wile E. Coyote moment.
China’s rapid reopening has been widely perceived as the key factor bolstering the outlook. But expectations may be a bit heady. The National People’s Congress 2023 growth target of around 5% was viewed as modest, dashing hopes for a strong surge in Chinese growth. Despite talk of massive potential for personal ‘revenge’ spending, consumers may remain cautious, especially given a limited social safety net, and uncertainties surround the housing market.
Chinese macroeconomic authorities have exercised considerable restraint in recent years, keeping a lid on leverage and recognising that the investment-led growth model is increasingly flailing. That trend is unlikely to change and local government finances are strained. President Xi Jinping seems intent on bolstering centralisation and control. Low global growth will keep a lid on external demand. Chinese total factor productivity is quite low. US-China economic tensions will not help to boost confidence either.
The euro area is throwing curveballs at forecasters. Energy prices are lower than previously anticipated and energy supplies are in good shape. There is growing confidence the supply for next winter is secure. The February purchasing managers index was favourable. But the outlook isn’t bright. National statistics are creating a cacophony about the real economy and Germany may already be in mild recession.
Inflation is proving stickier on the upside than anticipated – 8.5% year over year in January. The European Central Bank had previously swung decidedly towards a hawkish mode – even doves were throwing in the towel. Debates had emerged about whether a 4% terminal deposit rate was a possibility, versus expectations of a 3.5% peak. But now, whether there is a lasting impact from Credit Suisse developments may be somewhat determinative.
Japan, after years of deflation and slow growth, is also raising red flags for global markets. With inflation around 3.5%, economists are debating whether Japan has broken the back of deflation and the 2% target can durably be met or whether mean reversion will set in. This debate is tied up with forthcoming spring wage developments. More significantly, the Bank of Japan’s new leadership is seen as likely to modify or end yield curve control, and how that unfolds could have potentially disruptive consequences for global bond markets.
Upward revisions to forecasts for emerging markets and middle-income countries also may not continue against a backdrop of mediocre global growth.
On balance, global forecasts may be marked up a bit this spring. But questions facing the outlook and markets – especially in advanced economies – are only growing. How will US and European rate hikes impact real activity and when? Will China’s rebound be cautious or robust? Will an end to YCC disrupt global financial markets? How will the latest US and European financial instability impact growth and monetary policies?
Stay tuned. More mood swings may soon be in the offing.
Mark Sobel is US Chair of OMFIF.