We were wrong about global growth in 2022 – what can we expect in 2023?
The world has entered a time of greater macro and market volatility, and we should not expect too much of 2023 regarding global growth.
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We were wrong about global growth in 2022 and, therefore, the question at the beginning of the year is what can we expect in 2023?
The World Bank warns that we have shifted from an era of relative predictability to a world with more fragility and with this fragility comes greater uncertainty, higher volatility, geopolitical strife and more frequent climate-related disasters that will darken the outlook for growth.
Despite the new Omicron variant of Covid-19 throwing a shadow over the beginning of 2022, people around the world were feeling surprisingly positive about the prospects for 2022, with a poll conducted by Ipsos in 33 countries finding that three quarters of respondents had more upbeat expectations for 2022 based on expectations of better global growth and lower volatility in financial markets.
However, many were unfortunately surprised at the negative way 2022 has unfolded, says Herman van Papendorp, head of investment research and asset allocation at Momentum Investments.
Have we entered a new regime of greater macro and market volatility?
“The globe is facing higher levels of geo-economic fragmentation, reduced liquidity, a lower growth pattern in China, increased global conflict and higher inequality. This could lead to shorter and more erratic economic cycles, resulting in more volatile discount rates and lower equity valuations,” he says.
“The world economy faced a spate of ill-fated events in 2022, starting with Russia’s war of aggression in Ukraine, a crippling energy crisis, higher inflation, tighter global financial conditions and strict lockdown measures in China.”
More regular economic and political shocks are likely to throw economies off course more easily unless a greater level of resilience is instilled at a macroeconomic level.
What does this mean for prospects for growth in 2023? Van Papendorp says prospects for growth in 2023 have dimmed considerably. At the beginning of 2022, the consensus expected developing markets to grow at 2.4% in 2023, but this projection has faded to 0.7%.
“Similarly, financial markets were looking forward to growth of 4.8% in emerging markets in 2023, but these forecasts have since slipped to 4.3% in spite of 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 were worse during the global financial crisis (2009) when expected global growth experienced a downgrade of around 5.5% in the year running up to the recession.
The same was true for the Covid-19 pandemic, when downward revisions to expected global growth in the year before the pandemic amounted to more than 7%.
“In this context, the adjustment to growth forecasts this time around does not appear as severe and as such, we see the risk of a global downturn as higher than an outright global recession.”
The World Bank makes a clear distinction between global downturns and global recessions. In the case of the past three global downturns in post-war history (1998, 2001 and 2012), growth in global gross domestic product (GDP) on a per capita basis averaged more than 1.2%.
On the other hand, per capita GDP declined by an average of 2% during the five post-war recessions in 1975, 1982, 1991, 2009 and 2020.
A contraction in real GDP per capita affects standards of living and has significant socio-economic repercussions, making the distinction between a downturn and a recession important, Van Papendorp says.
However, he warns, the risk of a global recession in 2023 cannot be ruled out at this stage. “With the IMF predicting that growth in more than a third of economies worldwide will contract either this year or next year, up from 5% at the start of 2022, the World Bank warns that only a small shock is required to knock the global economy into a deeper slump.”
Indicators such as global growth, manufacturing new export orders, the global purchasing managers’ index and global equity prices have followed the same path as prior global recessions.
However, this time consumer sentiment fell more sharply relative to past cycles on the back of a collapse in growth in real disposable income of negative 3.5% for the global economy, due to rising living costs.
Van Papendorp also warns that although an over-tightening in monetary policy raises the risk of negative growth outcomes sooner, the risk of under-tightening is seen to pose a bigger threat. “Unhinged inflation expectations could force central banks to tighten policy even more over a longer period, damaging growth and jobs.”
He says a further easing in supply chain disruptions, favourable base effects in food and fuel and demand destruction are expected to drive inflation lower in 2023, but a return to central bank targets could nonetheless take time, given stickier services and wage inflation.
“In our view, central banks need to have clear sight of a sustained deceleration in underlying inflation and a reversal in tight labour market conditions for interest rate cuts to be considered. Market-implied policy rates point to a peak in the US federal (Fed) funds 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.”
He says a positive surprise in 2023 could see faster relaxation in Covid-19 regulations in China, a warmer winter in Europe that prevents energy rationing or stronger real wage growth for the US consumer can lift the base case view on global growth.
But what if everything goes wrong at the same time? “Stickier inflation leading to additional interest rate tightening, a colder European winter that forces more energy rationing, an extension of China’s zero-Covid strategy, renewed Chinese property sector woes or an accelerated decoupling between the US and China could leave global growth at a mere 0.5% in 2023.
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