The Economic Outlook for 2023 So Far: A Year of Testing
Economic Overview
The outlook for a robust global economic recovery is still uncertain due to persistent inflation, increasing interest rates, and heightened global uncertainties. The World Economic Situation and Prospects report, as of mid-2023, highlights the risk of a prolonged period of low growth, exacerbated by the lingering effects of the COVID-19 pandemic, escalating climate change impacts, and unresolved macroeconomic structural issues.
KEY POINTS:
- The global economic recovery remains uncertain due to inflation, rising interest rates, and global uncertainties.
- Projected world economy growth for 2023 is revised, falling short of pre-pandemic levels.
- Developing countries face challenges with credit conditions and rising costs.
- Global trade and inflation continue to pose concerns.
- Resilient labour markets in developed economies contribute to robust spending but pose inflation challenges.
- China faces a potential deflation crisis impacting global demand.
- Global executives express cautious optimism.
- Navigating these challenges requires vigilance and adaptability for sustainable growth.
According to the the most recent World Economic Situation and Prospects report, published by the United Nations, the projected growth of the world economy for 2023 has been revised to 2.3%, showing a slight improvement of 0.4 percentage points from the January forecast. Resilient household spending in the United States has prompted an upward revision of the growth forecast to 1.1% for 2023. Similarly, the European Union’s economy is expected to grow by 0.9%, driven by lower fuel prices and robust consumer spending. China’s growth for the year is now forecasted at 5.3%, following the lifting of COVID-19-related restrictions.
Despite the growth rate falling short of the pre-pandemic average of 3.1%, these recent revisions are positive developments. Although many developing countries are facing challenges due to tightening credit conditions and rising costs of external financing. In Africa, Latin America, and the Caribbean, GDP per capita is projected to increase marginally, reflecting a longer-term trend of more positive economic performance. Less developed countries are expected to grow by 4.1% in 2023 and 5.2% in 2024, significantly below the 7% growth target set in the 2030 Agenda for Sustainable Development.
Global trade continues to face pressure from geopolitical tensions, weakening global demand, and stricter monetary and fiscal policies. The volume of global trade in goods and services is forecasted to grow by 2.3% in 2023, which remains below the pre-pandemic trend but represents a positive outlook for current times.
Nominal Growth Vs Real GDP Growth
Amidst the uncertain global economic recovery marked by inflation, rising interest rates, and heightened uncertainties, it is essential to understand economic indicators accurately. Two crucial metrics to comprehend are nominal growth and real GDP growth. While nominal growth considers both quantity and price changes, real GDP growth provides a clearer picture of an economy's actual performance. Understanding these distinctions enables us to gauge performance in the context of the broader economic landscape. This level of knowledge assists in making strategic and well-informed decisions for sustainable growth.
Inflation still remains a concern in many countries, despite international food and energy prices starting to decline. Average global inflation is projected to be 5.2% in 2023, down from the two-decade high of 7.5% recorded in 2022. Nevertheless, inflation is expected to stay above central banks’ targets in several countries, due to factors such as local supply disruptions, and market imperfections.
Labour markets in developed economies, such as the United States and Europe, have shown remarkable resilience, contributing to robust household spending. However, factors such as worker shortages and unemployment rates have led to increased wage gains. Employment rates are at a record high in many developed economies, and the gender pay gap has narrowed since the pandemic.
The stronger labour markets do pose a challenge for central banks in controlling inflation. While central banks, including the Federal Reserve, the European Central Bank, and others in developed countries, have raised interest rates in 2023, the pace of tightening has slowed compared to the previous year, which saw the most aggressive monetary tightening in decades. The turmoil in the banking sectors of the United States and Europe adds further uncertainties and challenges for monetary policy. Swift actions by regulators have helped mitigate financial stability risks, but vulnerabilities in the global financial system and the measures taken to address them are likely to dampen credit and investment growth.
Further Risks
Temporary deflation can benefit households by raising buying power and keeping interest rates down. However, extended periods of falling prices can lead to a low-growth trap with stagnating pay and job cuts.
In addition to these ongoing challenges, the global economy is also facing other risks, such as the situation in China. China’s economy is facing a potential deflation crisis as its recovery from the pandemic slows down. Consumer Price Inflation (CPI) has fallen to zero in the year to June, with factory gate prices also declining sharply. This means that the country is grappling with various challenges, including low consumer demand, tensions with the US impacting business activity, and a struggling property market.
To combat deflation, experts suggest that China’s central bank may further reduce interest rates and release liquidity through banks’ reserve requirement ratio cuts. Fiscal stimulus policies are considered but concerns about high debt-to-GDP levels make authorities cautious. Chinese economists advise targeting consumers rather than investing in big infrastructure projects for effective stimulus.
Overall, the Chinese government faces a challenging task to navigate away from deflation and sustain economic growth.
IMPACT TO BUSINESS
According to the latest Business Insights and Impact on the UK Economy report (Office for National Statistics), business conditions in the UK remain challenging. However, estimates do show signs of improvements across a range of measures.
Around 60% of businesses reported some form of concern when looking ahead to August 2023, which is the lowest percentage reported since February 2023. The biggest concerns for businesses, according to the report include the falling demand for goods and services (16%) and price increases (16%). On a more positive note, concerns over energy prices fell to less than 10%, the lowest it has been since the report introduced measuring that figure. Almost 30% of UK businesses who took part in the report for July 2023 reported having no concerns for their business.
Other key findings of the July 2023 ONS report include information about worker shortages and demand for skills. Almost 20% of businesses reported both worker shortages and a gap in the demand for skilled workers. Businesses in the accommodation and food service industries reported the highest percentage of demand for customer service skills (51%), demonstrating why the subject of recruitment and staff retention should be high on the agenda of businesses across all sectors.
Finding and keeping talented employees is vital for an organisation’s financial stability and essential for maintaining high levels of productivity, engagement, and customer satisfaction.
Economic optimism was echoed in a recent McKinsey Global Survey on economic conditions. For the first time in more than a year, global executives taking part in the survey were more positive than negative about conditions in the economy. Respondents shared a largely brighter view of the current state of their own countries’ economies and the world economy as a whole. Their responses to the survey also suggest an evolving perspective on the interest rate environment, with the smallest share of executives since June 2021 expecting their countries’ interest rates to increase.
As we look ahead to the economic outlook for 2023, it becomes evident that this year is a testing time for global economies. Persistent inflation, increasing interest rates, and heightened global uncertainties continue to cast a shadow on the path to a robust recovery. While there have been some positive developments with revised growth projections in certain regions, challenges persist in many developing countries, hindering progress towards their Sustainable Development Goals.
Global trade faces pressure from a range of factors, and inflation remains a concern in several countries despite some easing from previous highs. However, the resilience of labour markets in developed economies has contributed to robust household spending, although it poses challenges for controlling inflation.
Furthermore, the economic landscape is still fraught with additional risks, such as China’s potential deflation crisis, and balancing interest rates, liquidity measures, and fiscal stimulus to target consumers effectively will be crucial in navigating away from deflationary pressures.
Despite the uncertainties, there is a glimmer of optimism reflected in the recent surveys, as global executives express a more positive outlook on the current state of their countries’ economies and the world economy as a whole. This evolving perspective on the interest rate environment also signals a cautious but hopeful stance.
In conclusion, the economic outlook for 2023 remains uncertain and challenging. While there are pockets of progress, various factors continue to test global economies. Policymakers, businesses, and individuals alike must remain vigilant and adaptive in their strategies to navigate these uncertain times and foster sustainable growth and development.
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