The global economy experienced a significant slowdown in 2022 due to surging inflation, a tightening of monetary policy, weakening confidence levels, and heightened geopolitical tensions, particularly related to Ukraine. However, concerns about a potential recession in advanced economies in 2023 have largely diminished. While survey data, especially in manufacturing, have been weak, real economic data have generally exceeded expectations, particularly in the US, UK, and Japan. Lower commodity prices, declining inflation, and robust labor markets have all contributed to economic activity, leading to better-than-expected GDP growth in the last quarter of 2022 for major developed economies. Forecasts for 2023 GDP in the US, UK, and Japan have been revised higher.
Despite these positive developments, significant risks to the economic outlook persist. The delayed impact of the sharp interest rate hikes in 2022-2023 has yet to fully affect economies, particularly in terms of refinancing maturing term debt at higher rates. The OECD and IMF continue to warn that higher interest rates could expose underlying financial vulnerabilities, potentially leading to a rise in loan defaults, especially in low-income countries where signs of debt distress are already present. Additionally, commercial real estate markets in many countries are under pressure, which could result in an increase in bad debts and strain the balance sheets of lenders with significant exposure to the sector. Furthermore, if inflation proves to be more persistent than anticipated, it could lead to even higher interest rates, further dampening financial and real estate asset prices.
China’s expected economic rebound in 2022 has been underwhelming, primarily due to ongoing issues in the real estate sector and concerns about the stability of the financial system. Recent economic data have been disappointing, with weakening exports and the consequences of China’s debt-driven investment in infrastructure and property becoming apparent. The focus now is on deleveraging, which is suppressing domestic demand. There are warnings that China could enter a prolonged period of stagnation and deflation if measures to stimulate activity, especially consumer spending, are not implemented. These problems in China coincide with a growing fragmentation of the global economy as tensions escalate between the West and other major global powers. The IMF has highlighted that these deepening tensions could lead to increased trade restrictions and limitations on cross-border movements of capital, technology, and labor, thereby damaging global growth.
Therefore, it is premature to conclude that the global economy will emerge unscathed from the significant tightening of monetary policy witnessed in recent years. The downward trend in business surveys, particularly the Purchasing Managers’ Index (PMI), which is a reliable leading indicator of activity, is concerning. The flash PMIs for major economies in August were notably weak, especially in Europe. The OECD and IMF maintain a cautious outlook for next year’s growth prospects in advanced economies, with subdued growth of around 1% being the best-case scenario despite lower inflation. Furthermore, as mentioned earlier, the risks to economic activity remain predominantly on the downside. In summary, the world economy is not yet out of the woods.
Oliver Mangan, Chief Economist at AIB, highlights these ongoing concerns about the global economy and emphasizes the need for continued vigilance and careful monitoring of the various risks and vulnerabilities that could impact economic performance in the coming months and years.