Curmi & Partners

What a difference a few months make to the global economic outlook

By Nicole Busuttil

The big fear heading into the new year was that of a recession in the major economies. But since then, global growth seems to be improving. Global GDP growth is now expected to increase to 2.4% year-on-year in 2023 according to Bloomberg forecasts, up from 2.1% previously forecasted as at end-2022. A dramatic reversal of China’s COVID policies and the eventual reopening are leading to a sharp recovery in activity there and contributing to this improved view. Moreover, the drags from tighter financial conditions and the energy crisis in Europe are diminishing. Despite the improved forecast, this remains below the 2022 global GDP growth of 3.4% year-on-year as central bank policy remains restrictive.

China’s faster-than-expected rate of reopening has improved the economy’s GDP forecast for 2023. Bloomberg now forecasts a GDP growth of 5.2% year-on-year compared to the forecast of 4.9% seen at end-2022. According to Goldman Sachs (“GS”), the reopening and the recovery of Chinese domestic demand, as reported in the February expansionary Purchasing Managers’ Index data, could raise global GDP by 1% by end-2023. China’s reopening will impact global growth through three direct channels according to GS: (1) increased domestic demand of around 5% and a lift in core goods exports from Asia-Pacific economies; (2) international travel leading to a recovery in demand for foreign services; and (3) commodity demand and the resultant increase in prices, particularly for oil.  

However, China’s reopening is also likely to boost global inflation due to increasing demand for energy and therefore the prices of commodities, contributing to headline inflation, particularly for oil-dependent emerging markets. According to GS, China’s reopening could account for a 0.5 percentage point boost to headline inflation in many economies. A larger inflation impulse attributable to a better-than-expected recovery may force central banks to hike rates further than expected to keep growth below potential and remain on track to tame inflation.

Economists have dropped their forecast of a recession in the Euro Area due to a sharp drop in European energy prices, now lower than prior to the Ukraine invasion, combined with continued government support and a resilient household sector. As at end-2022, Bloomberg forecasts showed expectations of a contraction of 0.1% year-on-year given that economists were concerned the energy crisis hitting the Euro Area would push the economy into a recession during the winter months. However, the forecast has now been revised up to a 0.4% year-on-year growth, boosted by the warmer winter weather and by the reopening of China. According to a report published by GS in February, China’s earlier reopening is expected to boost the Euro Area GDP by around 0.2% over the next four quarters.

Furthermore, the warmer winter has aided the decline in energy prices given below norm demand, helping to lower firms’ input costs which, together with a further easing in global bottlenecks, should help cool energy and non-energy goods price inflation notably. However, so far, we have been seeing increasingly sticky headline inflation at 8.5% in February (flash estimate) compared to the prior 8.6%, and a still uncomfortably high core inflation of 5.6% in February (flash estimate) compared to the prior 5.3%. As a result, markets are pricing in a number of additional policy hikes in their forecasts which, if they pan out, could deteriorate economic activity outlook once again.

In the United States, Bloomberg economic forecasts have also improved for 2023, increasing from the GDP growth of 0.4% year-on-year expected as at end-2022 to 0.8% year-on-year at the end of February, this being below-potential growth (potential growth is estimated at around 1.8% by GS), which is one of the requirements to reverse inflationary overheating without causing a recession. GS see a below-consensus 25% probability of a recession over the next year due to progress on the labour market rebalancing and a diminishing drag from fiscal and monetary policy tightening. While the near-term inflation outlook appears challenging, GS expect core Personal Consumption Expenditures inflation, the Federal Reserve’s preferred gauge to measure inflation, to decline to 3.3% by end-2023 from the recently reported 4.7% for January. This decline is expected due to the continued supply chain recovery, a peak in shelter inflation and slower wage growth.

On balance, the macroeconomic backdrop has improved since the start of the year. However, uncertainty remains from the recent uptick in inflationary pressures and the potential impact on global growth if monetary conditions are tightened further and for longer.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.