Global economy faces a difficult winter half-year

The global economy expanded solidly in the second quarter of 2023, but without much momentum. Almost everywhere, economic development continued to be held back by higher interest rates and still elevated inflation rates. However, there were clear differences between the individual economic areas. Gross domestic product expanded quite robustly in the United States, thanks in part to fiscal packages to promote investment in semiconductor production and renewable energies. The economy also grew significantly in Japan and major emerging economies, particularly Mexico. In the eurozone and the United Kingdom, on the other hand, the economy continued to make little headway. In China, the economic recovery from the zero-covid policy was disappointing and the smoldering debt problems in the real estate sector became more apparent again.

The global economy is likely to have continued to expand only moderately in the third quarter. The differences between the individual countries and economic areas are likely to remain large. Overall, there will be little growth impetus from the advanced economies. In the early summer months, industrial production and retail sales have mostly been subdued, with the situation in the United States and the advanced economies of Asia looking better than in the euro zone and the United Kingdom. In Europe, the energy crisis has not led to the deep recession often feared; however, the consequences are reverberating and slowing economic momentum.

I expect Europe – especially Germany and the United Kingdom – to experience a recession in the winter half-year. The purchasing managers’ indices, particularly for industry, have recently remained well below the expansion threshold of 50 in many places. The outlook for services, where corporate sentiment is somewhat better, is more favorable. In addition, consumer confidence has brightened somewhat in recent months. In view of somewhat lower inflation rates, household consumption should receive a boost and provide at least some momentum for economic development in most countries. Stronger expansion is expected in most emerging countries. The Mexican economy, for example, is benefiting from efforts by American companies to shift production and the sourcing of inputs away from China. The Brazilian economy is likely to continue to be supported by strong exports of agricultural goods. The Chinese economy, on the other hand, is weakening and is likely to expand only slightly. In addition to the disappointing recovery after the pandemic, high debt levels, particularly in the real estate sector, and trade and geopolitical conflicts with Western countries are weighing on the Chinese economy.

In the current year, monetary policy in many advanced economies – with the exception of Japan – remains restrictive. On a month-on-month basis, inflation rates are gradually approaching the inflation targets of the central banks or, in some cases, are already within the target range. However, year-on-year core inflation in particular – i.e. inflation excluding energy and food prices – is still significantly higher in many economic areas. The central banks are unlikely to lower interest rates until they see price stability guaranteed on a sustained basis. In addition, the decline in inflation is likely to slow temporarily in the third quarter in view of the recent rise in oil prices.

In 2023, average inflation in most advanced economies will still be well above the targets set by the respective central banks. In 2024, however, inflation will approach the targeted rates and reach or even fall below the target range by 2025 at the latest. The interest rate hike cycles of the central banks are now likely to slowly come to an end, and interest rates thereafter will remain at a high level for the time being. The first cuts in key interest rates are expected in the USA and the eurozone from 2024.

Monetary policy is also restrictive in many emerging countries. However, inflation rates and interest rates are now likely to have peaked in these countries as well. In Brazil, interest rates were even lowered slightly at the beginning of August. In India, however, inflation is expected to pick up slightly again temporarily due to poor harvests. In China, the situation is different. The weak recovery following the abandonment of the zero-covid policy and the smoldering real estate crisis are weighing on domestic demand and dampening price developments.

Fiscal policy will provide little stimulus to the economy in the forecast period. The fiscal policy measures to cushion the economic impact of the energy crisis last winter have already largely reached companies and private households. The support measures adopted during the Corona pandemic have largely expired. Stimulating effects on the economy are coming from medium-term investment packages adopted in the EU (NextGenerationEU) and the USA (Inflation Reduction Act, Chips Act and other infrastructure measures), in particular to accelerate the ecological transformation and the production of semiconductors. Against the background of high interest rates and quite favorable economic development, no extensive fiscal packages are expected in emerging countries either.

In view of slowly declining, but mostly still high, consumer price inflation, a restrictive monetary policy and little fiscal stimulus, the global economy will continue to expand only sluggishly. The labor market, which is robust in many places for the time being, is having a stabilizing effect. Many people do not currently need to worry about losing their jobs, which is supporting private consumption. In the current year, emerging markets will account for most of the world’s growth.

In the remainder of the forecast period, economic development in the advanced economies is unlikely to gain further momentum for the time being. A strong upturn is not in sight; initially, many countries, particularly in Europe, are likely to experience a recession in the winter. The USA could slip just short of a recession. Only from 2025 onwards do my models point to higher growth rates again, albeit with a high degree of uncertainty.

All in all, I expect the global economy to grow by 3.7 percent in the current year 2023. In 2024, growth will weaken somewhat to 3.5 percent due to a weak start. In 2025, the global economy is expected to grow again somewhat more strongly at 4.0 percent.


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