Economic Outlook - July 2023

Executive summary

The global economy is performing better than we expected at the start of the year, which means that a 'stagflation' scenario has been averted for now. The reopening of the Chinese economy after Covid along with resilience of the US and eurozone economies to high energy prices are bringing relief to global growth in 2023. However, the full effect of monetary tightening on demand is still to be felt, keeping our 2023 and 2024 outlook subdued. We consider a deepening of persistent inflation to be the main risk to our outlook. The further central bank rate hikes that would be necessary in such a scenario, would push GDP growth in the US and eurozone in or close to negative territory.

• Global GDP growth is forecast to slow to 2.2% in 2023 from 3.1% in 2022. Despite the slowdown, the 2023 forecast is significantly better than what we expected six months ago. There are two major reasons for this upgrade. First, the reopening of China after the sudden reversal of the zero-Covid policy that happened earlier this year. Second, the US and eurozone economy proved more resilient to ‘stagflation’ forces, such as the energy price shock and sanctions on trade related to the war in Ukraine. For 2024, we foresee 2.1% growth globally. This is a subdued growth rate in historical perspective, as the full effect of monetary policy tightening and sticky inflation are increasingly felt.

• As energy prices decline, headline inflation has moved past its peak. In major economic regions such as the eurozone and US, core inflation (inflation excluding energy and food) remains sticky however. Underlying this is the gradual normalisation of demand after the pandemic. Demand switching back from goods to services such as travel, hospitality and events is driving up price pressures in the services sector in particular. With monetary policy tightening gradually taking effect, we expect inflation to come down significantly over the forecast period.

• We forecast global trade growth to slow down to 1.9% in 2023, from 3.2% in 2022. The trade forecast for 2023 is better than previously expected as GDP growth in the US and eurozone turns out more resilient and China’s reopening has a beneficial impact. For 2024 we predict a slight recovery of trade growth to 2.5%. Our forecast is in line with the prediction that the relationship between trade growth and GDP growth has settled down to 1:1.

• We project GDP growth across advanced markets to reach 1.0% in 2023, better than the stagnation expected at the beginning of the year due to consumer resilience. But as the effects of monetary tightening are increasingly felt, growth in 2024 remains very restrained at 0.9%.

• GDP growth in emerging market economies (EMEs) is forecast to stay in lower gear at 3.9% this year and 3.8% in 2024. Under the headline figure lies substantial heterogeneity. Emerging Asia is set to lead other regions again as China’s economy rebounds from Covid lockdowns. Latin America, struggling with structural weaknesses and political uncertainty, will lag other regions.

• In our baseline scenario inflation is expected to come down as monetary tightening has its effect on demand, compounded by stricter lending conditions. There is, however, also an alternative scenario possible, one with persisting inflation. If such a scenario plays out, central banks have to react will further rate hikes. This is then likely to push GDP growth in the US and eurozone in or close to negative territory.