We were wrong about global growth in 2022 and so the question at the start of the year is what can we expect in 2023? The World Bank warns that we have moved from an era of relative predictability to a world of greater fragility, and with that fragility comes greater uncertainty, higher volatility, geopolitical unrest and more frequent climate-related disasters that will cloud growth prospects. Although the new Omicron variant of Covid-19 in early 2022 cast a shadow over the start of 2022, people around the world were surprisingly positive about the outlook for 2022 as a poll was conducted…
We were wrong about global growth in 2022 and so the question at the start of the year is what can we expect in 2023?
The World Bank warns that we have moved from an era of relative predictability to a world of greater fragility, and with that fragility comes greater uncertainty, higher volatility, geopolitical unrest and more frequent climate-related disasters that will cloud growth prospects.
Despite the shadow of the new Omicron variant of Covid-19 in early 2022, people around the world were surprisingly positive about the outlook for 2022, with a survey conducted by Ipsos in 33 countries showing three-quarters of those polled were more optimistic Expectations for 2022 based on expectations of better global growth and lower financial market volatility.
Unfortunately, many were surprised that 2022 turned out negatively, says Herman van Papendorp, head of investment research and asset allocation at Momentum Investments.
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Have we entered a new regime of greater macro and market volatility?
“The globe faces higher levels of geoeconomic fragmentation, lower liquidity, a slower growth pattern in China, increasing global conflicts and greater inequality. This could lead to shorter and more unpredictable economic cycles, leading to more volatile discount rates and lower stock valuations,” he says.
“The global economy faced a spate of unfortunate events in 2022, beginning with Russia’s aggressive war in Ukraine, a crippling energy crisis, higher inflation, tighter global financial conditions and tough lockdown measures in China.”
More regular economic and political shocks are likely to derail economies more easily unless a higher level of resilience is built at the macro level.
What does more volatility mean for global growth?
What does this mean for growth prospects in 2023? According to Van Papendorp, growth prospects in 2023 have clouded over significantly. At the start of 2022, the consensus expected emerging markets to grow 2.4% in 2023, but that forecast has declined to 0.7%.
“Similarly, financial markets were looking forward to 4.8% growth in emerging markets in 2023, but those forecasts have since declined to 4.3%, despite a better expected outcome for China in 2023.”
He says although these revisions seem large, the World Bank notes that market revisions to growth in the year before a recession during the global financial crisis (2009) were worse than expected global growth the following year, a downgrade of about 5.5% experienced the recession.
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The same was true for the Covid-19 pandemic, when downward revisions to expected global growth amounted to more than 7% in the year before the pandemic.
“In this context, the revision of growth forecasts does not appear so severe this time and therefore we see the risk of a global slowdown as higher than a full global recession.”
The World Bank makes a clear distinction between global downturns and global recessions. During the last three global downturns in post-war history (1998, 2001 and 2012), growth in global gross domestic product (GDP) per capita averaged more than 1.2%.
On the other hand, GDP per capita fell by an average of 2% during the five post-war recessions in 1975, 1982, 1991, 2009 and 2020.
A decline in real GDP per capita affects living standards and has significant socio-economic implications, which is why the distinction between a downturn and a recession is important, says Van Papendorp.
Don’t rule out the risk of a global recession in 2023
However, the risk of a global recession in 2023 cannot be ruled out at this stage, he warns. “With the IMF forecasting that growth in more than a third of the world’s economies will contract either this year or next, from 5% at the start of 2022, the World Bank warns that only a small shock is needed to world economy into a deeper slump.”
Indicators such as global growth, new manufacturing export orders, the global purchasing managers’ index and global equity prices have followed the same path as previous global recessions.
This time, however, consumer sentiment fell more sharply than in previous cycles as real disposable income growth plunged by -3.5% for the global economy on the back of rising living costs.
Van Papendorp also warns that while excessive monetary tightening increases the risk of negative growth outcomes sooner, the risk of tightening too little is seen as a bigger threat. “Fleeting inflation expectations could force central banks to tighten monetary policy even further for an extended period of time, hurting growth and jobs.”
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He says further easing of supply chain disruptions, favorable base effects in food and fuel, and demand destruction are likely to push inflation lower in 2023, but a return to central bank targets could still take some time amid more resilient services and wage inflation take advantage of.
“In our view, central banks need to have a clear eye on a sustained slowdown in underlying inflation and a reversal in tight labor market conditions for rate cuts to be considered. Market implied interest rates point to a peak in the US Federal Reserve Rate of 5% in the first half of next year. Market participants are pricing in a cut before the end of next year after an expected pause.”
Results of positive and negative surprises in 2023
He says an upside surprise in 2023 could lead to faster easing of Covid-19 regulations in China, a warmer winter in Europe preventing energy rationing, or stronger real wage growth for the US consumer could be the baseline scenarios for the global improve growth.
But what if everything goes wrong at the same time? “More rigid inflation leading to further tightening of interest rates, a colder European winter forcing more energy rationing, an extension of China’s zero-Covid strategy, renewed problems in China’s real estate sector, or an accelerated US-China decoupling could leaving global growth at a higher level of 0.5% in 2023.