Economic Outlook - December 2022

Executive summary

Stagflation light on the horizon

• The global economy is facing an unprecedented mix of challenges, which are bringing it to the brink of recession in 2023.

• Stubborn inflation is the direst challenge, which has far-reaching knock-on effects across the entire global economy.

• We now find ourselves in a much-feared ‘stagflation’ reality – one characterised by low GDP, but high price growth. Central banks have undertaken an aggressive tightening path to prevent an entrenchment of high prices and low growth. While this comes at a cost for global demand, it just may be enough to ensure ‘stagflation light’.

Main findings

Sharp deterioration of global growth in 2023

• As stagflation kicks in, we expect global GDP growth to decrease to 1.2% in 2023, down from 2.9% in 2022. The slowdown is broad-based, primarily driven by the cost-of-living crisis in advanced economies, tighter financial conditions, the ongoing war in Ukraine and lingering effects from the pandemic.

• However, this downturn should be relatively short-lived, as contraction of demand allows prices to cool off and stagflation dissipates in the course of 2023. We expect global economic growth to pick up again in 2024, by 2.9%.

Inflationary pressures to ease next year

• We expect that global consumer inflation has reached its peak, and that disinflation will pick up next year. We forecast the average inflation to decrease from 7.9% in 2022 to 5.3% in 2023. Rapidly tightening monetary conditions are easing demand-side pressures, as supply chain bottlenecks subside. However, energy and food prices will remain volatile as long as the war in Ukraine continues.

Global trade growth moving to a halt

• Global trade growth has decelerated in H2 of 2022, as the pandemic-related catch-up effects fade and global demand falters. With sentiment indicators deep in contractionary territory, we currently forecast trade to grow only 3.0% in 2022 and 1.5% in 2023.

• As the global economy should rebound in late 2023, so will global trade. In 2024, we expect a trade growth in the range of 2.5% to 3%.

Advanced markets: inflation woes persist, hampering growth in 2023

• Due to the energy crisis, growth in advanced economies levels off in 2023 (0.0%), after a meagre increase of 2.5% in 2022. We expect that several key advanced markets – the US, the UK and the eurozone – will fall into recession in 2023. Fiscal policy remains supportive next year, as many governments implement policy measures to shield households from rising energy costs. Central banks, on the other hand, have started to tighten monetary policy to combat high inflation. 
• Eurozone: we expect GDP growth to contract by 0.1% in 2023 after a 3.1% increase in 2022. The region is facing several headwinds, in particular sharply increased energy prices, while the initial benefits from the reopening of economies are almost completely exhausted. Both manufacturing and services have slowed down, while household consumption suffers from high consumer prices. In 2024, we forecast eurozone GDP to expand 2.1%, as the negative economic effects of the war in Ukraine abate.
• United States: after 1.8% growth rate in 2022, we expect a 0.4% contraction in 2023. Surging prices and higher interest rates weigh on domestic demand, against a weak global backdrop. However, given the resilience of consumer spending, we expect next year´ recession to remain mild. In 2024, we forecast a modest 1.4% economic rebound.
• United Kingdom: we expect a 0.7% economic contraction in 2023, followed by a modest 1.8% rebound in 2024. Structural supply constraints, limited fiscal effects and post-Brexit trade disruptions exacerbate the negative impact of the war in Ukraine on (energy) inflation, consumer sentiment, and business supply chains. Government policy is further straining the outlook for consumer spending.
• Japan: we forecast GDP growth to slow from 1.6% in 2022 to 0.9% in 2023, followed by a 1.6% increase in 2024. Higher inflation and a subsequent squeeze in real incomes will suppress consumption growth in the coming quarters. While we expect export growth to improve due to a depreciating currency and the easing of supply-chain disruptions, this surge will be short-lived in the face of weaker global demand.

Emerging markets: tighter financial conditions ahead

• We expect GDP growth in emerging market economies (EMEs) to decelerate to 2.9% in 2023, down from 3.6% in 2022. EMEs in general have already been facing tighter domestic financing conditions and spill overs from the war in Ukraine (in particular higher energy and food prices). This will continue to drag on growth in 2023, as global demand weakens. The higher interest rate environment threatens the debt sustainability of EMEs with high private or government debt. Those are mainly low-income and developing countries.

• Brazil: after increasing 3.0% in 2022, we forecast GDP growth to slow down to 0.2% in 2023, as private consumption growth will suffer from tighter fiscal and monetary policies, while fixed investment growth remains stagnant. Tighter fiscal policy is needed to reduce the debt ratio, although the new government is expected to pursue a more lax spending approach. In 2024, growth should rebound by 2.7%.

• China: after a low 3.1% increase in 2022 due to comprehensive lockdowns, we forecast GDP growth to rebound by 4.2% in 2023 and 4.7% in 2024. A recovery in household consumption and strong fiscal stimulus should shore up growth, but uncertainty over future Covid policies by the government and issues in the real estate sectors remain downside risks.

• India: we expect 2023 GDP growth to decrease to 4.4% from 7.0% in 2022, due to a rapidly weakening global backdrop and slowing domestic demand. There is widespread weakness in the manufacturing industry, while high inflation will likely drag down household consumption growth.
• Russia: We forecast the economy to contract by 3.3% in 2022, followed by another 2.0% decline in 2023. The lower than previously expected contraction this year is mainly due to unexpected resilience of fixed investment, despite Western sanctions and the negative impact of the war on business confidence. Several key sectors (e.g. wholesale and retail, automotive) are hard hit by sanctions. However, energy exports boost the current account surplus, and due this and capital controls the rouble has regained all of its lost value.

Downside scenario: stagflation strong

• As the global economy teeters on the edge of recession in H1 of 2023, dragged down by advanced economies, we see the persistence of inflation as main risk. Should further energy price shocks occur, next to a vicious wage-price spiral in advanced economies, monetary policymakers would fail to rein in price growth.

• This would lead to a deeper global recession, with even higher prices further choking off growth. In such a scenario, we expect global growth to halve in 2023, to 0.6%. This would shave of 2.3% of GDP in the US and 1.5% in the eurozone in 2023.