The Economist Intelligence Unit (EIU) said despite strong headwinds, mostly related to the ripple effects from the war in Ukraine and high global inflation, the global economy has proven resilient so far in 2023.
In its report on 2023’s global economic outlook released on Wednesday (July 5), EIU said Europe avoided a deep recession in the winter of 2022/23, in part owing to warmer than usual temperatures and to the rapid switching to alternative energy sources following Russia’s decision to turn off gas flows.
It said US consumer spending has also held up better than it expected, with the labour market and consumer spending strengthening further in early 2023.
Finally, China’s exit from the government’s zero-Covid policy has also supported global activity. EIU therefore expects global growth to stand at a modest — but not anaemic —2.1% in 2023.
Global GDP growth will slow in 2023
EIU said despite the brighter outlook, a growth of 2.1% this year would still represent a slowdown.
It said the full-blown war in Ukraine is affecting the global economy via higher commodity prices, supply-chain disruptions and Russia’s weaponisation of energy supplies.
EIU said this situation will persist throughout 2023 (and probably beyond), as it expects the war to become a protracted conflict with no clear resolution.
The economic impact of the war is being felt especially strongly in Germany and central Europe, where energy-intensive industries will struggle to remain competitive.
“In the US, we still expect annual growth to slow sharply this year, to only 1%, as the pace of consumer spending becomes unsustainable in the face of high inflation and a steep rise in interest rates.
“In China, the initial rebound in consumer activity after the lifting of the government’s zero-Covid policy has been strong,” it said.
However, EIU said China’s recovery has fallen short of expectations.
“Despite our forecast of full-year growth of 5.5% in 2023, that performance reflects a low base of comparison.
“Sources of stress relate to excess capacity in the manufacturing sector; an ephemeral recovery in the housing market; the deleveraging of the household sector; elevated youth unemployment; and strains in local public finances,” it said.
EIU said it expects global commodity prices to continue easing from their 2022 peaks this year, but to remain well above pre-2021 levels.
However, it said China’s reversal of its zero-Covid policy has put upward pressure on oil prices, which it expects to remain above US$75/barrel until 2025.
“We expect global inflation to ease slightly, from 9.2% in 2022 to 7.1% in 2023.
“High global commodity prices, continued supply-chain disruptions stemming from the invasion in Ukraine and, in some parts of the world, the still-strong US dollar will keep annual inflation well above 2019 levels,” it said.
Risks to the global economy abound
EIU said several potential scenarios could derail its forecasts.
It said the most impactful of these include: an escalation of the war in Ukraine (notably following the start of Ukraine’s counteroffensive); social unrest arising from high inflation (especially given that high levels of public indebtedness constrain emerging countries’ room for manoeuvre to mitigate the impact on households); an escalation of tensions around Taiwan (following China’s frequent military manoeuvres around the island).
It said the financial contagion following the collapse since March of three US regional banks and turmoil at a Swiss banking giant, Credit Suisse; and extreme weather events, compounded by the likely resurgence later this year of the El Niño phenomenon, could further fuel global inflation. If one (or several) of these scenarios were to materialise, a global recession this year or next would be likely.