While catch-up effects following the waning of the Corona pandemic helped the global economy in the first half of 2022, rising inflation and higher interest rates slowed growth in almost all economies in the second half of the year. In the fourth quarter, the global economy grew by only 0.3 percent. All in all, however, the economy held up much better than had been feared in many places in the early fall of 2022. In the first quarter of 2023, inflationary pressures eased slightly and consumer sentiment lifted somewhat. Robust labor markets in particular are boosting consumer sentiment and supporting the economy. However, the global economy will recover only sluggishly this year with growth of 2.8 percent and next year of 3.4 percent, especially as no tailwind is expected from monetary and fiscal policy. Risks exist above all if the criticism in Ukraine escalates, China’s relationship with the West deteriorates, and turbulence on the capital markets increases as banks flounder.

The global economy lost considerable momentum in the fourth quarter of 2022. Economic growth was just 0.3 percent; in the third quarter, growth had still been a solid 1.2 percent. It is noteworthy that almost all economies experienced weak growth or even contraction. In the fourth quarter, catch-up effects after the pandemic subsided, which had previously supported the economy, played a lesser role than in the spring and summer of 2022. By contrast, the negative effects on the global economy that had already emerged at the beginning of the year made themselves felt more strongly in the fourth quarter, i.e. in particular high energy and food prices and generally higher inflation, which dampened household purchasing power. At the same time, the interest rate increases implemented by many central banks in the wake of higher inflation gradually put more of a brake on economic activity; a contraction in construction investment in particular was observed in many places.

In the euro zone, GDP stagnated in the final quarter of 2022, with both household consumption and investment declining. Economic development was supported by foreign trade, although this was less due to dynamic growth in exports. Rather, imports decreased, probably as a result of weak consumption and investment. Within the euro zone, developments were heterogeneous. While the economy contracted in Italy – as in Germany – the other major member countries France and Spain recorded slightly positive growth rates. The somewhat more favorable development in these countries is probably also due to currently lower inflation and a less pronounced energy crisis than in Germany and Italy. All in all, however, the euro zone economy held up much better than feared in early fall 2022. The economies of other European economies also performed weakly in the final quarter of 2022. In the United Kingdom and Switzerland, economic output still increased minimally. In Poland, the Czech Republic and other countries in Central and Eastern Europe, where inflation rates are very high and the effects of the war in Ukraine are particularly pronounced, the economy contracted in many places.

Overall economic production in the USA expanded even more strongly, with growth of 0.7 percent compared with the previous quarter. However, this significant growth was also due to a sharp increase in corporate inventories, presumably because households bought fewer goods than companies had anticipated. Against the background of high inflation and monetary tightening, domestic demand increased only slightly. An economic slowdown was also evident in the Asian economies in the fourth quarter of 2022. In Japan, gross domestic product stagnated, even though tourism was revived by the opening of the country to foreign visitors. Economic development was even weaker than in Japan in South Korea, where economic output declined at the end of the year. The cooling of the global economy there led to lower exports of electronic equipment, for example. In China, the economy stagnated in the final quarter of 2022. The strict measures to contain the pandemic still in force until early December and the smoldering debt problems in the real estate sector weighed on economic momentum. In the other emerging markets, the economy still grew in many places in the fourth quarter of 2022, but often at lower rates than before. India and Mexico, for example, recorded a marked slowdown in growth. In Brazil, economic output even declined slightly. The Russian economy is a special case. It is being hit hard by the war of aggression against Ukraine and the Western economic sanctions. The continuing or even increasing trade relations with other emerging countries, which do not or only partially support the Western sanctions, have so far prevented an even more significant decline in economic output.

No tailwind for the economy from economic policy

In the final quarter of 2022 and last winter, inflationary pressures eased somewhat in both the advanced economies and the emerging markets as commodity prices eased, but in many places they still remained well above the targets set by the respective central banks. Core rates in particular have recently remained at a high level in the United States and the euro area. Against this background, the central banks of most advanced economies continued to raise their key interest rates significantly in the winter months. However, the tighter monetary policy probably contributed in March to several banks in the United States – including Silicon Valley Bank and the regional bank First Republic – getting into difficulties and either collapsing or having to be rescued. A national banking crisis has so far been prevented by rapid rescue measures by the Federal Reserve. However, concerns about the stability of the financial system will lead the U.S. Federal Reserve to raise interest rates less sharply than might be expected in view of the inflation trend. In the euro zone, there have been no significant problems at commercial banks so far, but here, too, key interest rates will now rise less sharply than expected in February. Concerns about possible problems in the banking sector are leading central banks to walk a difficult tightrope between fighting inflation and maintaining financial market stability.

In both the USA and the euro area, inflation is likely to decline only slowly and remain noticeably above the central banks’ inflation targets for the time being. A similar development is expected in the United Kingdom and Switzerland. In Japan, key interest rates have so far remained unchanged, although inflation has recently been above 3 percent. Compared with other advanced economies, inflation is lower and even less broad-based. In China, there has been no surge in inflation so far, probably also because of subdued domestic demand due to pandemic control measures and the real estate crisis. In other emerging countries, such as India, Brazil and Mexico in particular, inflation rates are declining from a high level, partly due to sharp increases in key interest rates.

Fiscal policy is likely to be less expansionary in the forecast period than in the pandemic years. Support measures adopted during the Corona pandemic have been discontinued. However, programs have been added, for example in Europe and in many emerging countries, to cushion the impact of high inflation, especially on low- and middle-income households. Medium-term investment packages adopted in the European Union (NextGenerationEU) and the USA (Inflation Reduction Act and other infrastructure measures) are also having a minor stimulating effect on the economy, in particular to accelerate the ecological transformation.

Slow recovery with slowly declining inflation

In the forecast period, the global economy will recover only slowly from its current phase of weakness. In the industrialized countries in particular, the outlook is subdued. No tailwind is expected from monetary and fiscal policy. Added to this are still higher energy prices, risks in the banking sector and high geopolitical uncertainty. Nevertheless, the developed economies are likely to experience a gradual upturn after a weak first quarter. Inflation rates are declining slightly and the energy crisis has eased somewhat, at least temporarily. Both consumer confidence and business sentiment have recently improved somewhat. In the United Kingdom, the economic situation is still somewhat more fragile than in the rest of Europe, and GDP is therefore likely to decline further until the summer.

Private consumption in the advanced economies in particular is being supported by shortages on the labor markets. Unemployment is low, also against the background of demographic change and the shortage of skilled workers; most people need not worry about losing their jobs at present. However, the reduction in the purchasing power of many households triggered by high inflation is acting as a brake.

In most emerging countries, too, growth is expected to be stronger in the course of this year than in the winter. In India, but also in Brazil and Mexico, interest rates are now likely to peak gradually. Exports will gain some momentum against the background of a gradually more dynamic global economy. The only country where the economy is likely to grow significantly faster than in 2022 is China, where a solid increase in domestic demand can be expected following the end of the zero-covid policy.

All in all, growth in global production will be only modest this year. However, following a growth rate of just 2.8 percent, somewhat stronger growth of 3.4 percent is expected in 2024. Unemployment rates are expected to remain low against the background of continuing shortages on the labor markets. Inflation will gradually decline, but will still remain above the central banks’ targets on an annual average in 2023. Inflation rates will not return to normal until 2024.

The biggest uncertainty factor for the economy lies in the further course of the war in Ukraine. For example, there could be a further escalation of the conflict, which in particular could increase geopolitical uncertainty and cause commodity prices to rise more sharply again. Economic development in the world and especially in Europe would be further affected by this. However, an easing of the conflict – for example in the form of a ceasefire – is also conceivable, which would probably lead to a stronger revival of global economic development than assumed in this forecast.

However, the risk of geopolitical crises or even armed conflicts is also heightened in other regions of the world. In Asia, for example, geopolitical crises continue to smolder around Taiwan and the Korean peninsula. In this context, the ongoing political tensions between China and Western countries, especially the USA, should also be mentioned. The risk of a rapid deterioration in relations between China and the Western countries is increased, which would lead not least to distortions in international trade and capital flows.

The situation on the financial markets was added as a further risk to economic development in March. As a result of the rapid interest rate increases in the United States, risk management problems have come to light at some banks. Following the collapse of Silicon Valley Bank, a rescue program was put in place by the US Federal Reserve to support regional banks in particular. In Switzerland, too, there was a government-backed bailout of the bank Credit Suisse, which resulted in the merger with the bank UBS. So far, the problems at individual banks have not resulted in a large-scale financial crisis. However, the risk of this is increased and would stall the economic upturn assumed in this forecast.

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After the midterm elections in the U.S., there is hardly any time to take a deep breath on the political level. For now speculation will begin as to which of the Democrats and Republicans will enter the race for what will probably be another controversial presidential election in two years’ time. Although the midterm elections may strengthen the more moderate forces in both parties somewhat, society remains divided on many issues. This means political uncertainty at a time when the U.S. economy is likely to slip into recession or at least a slowdown in growth with rising unemployment. With inflation still high and only slowly declining, the Fed has little choice but to continue to raise interest rates sharply. If inflation does not come down faster than generally expected, interest rates will probably rise from today’s four percent to around five percent. The more restrictive monetary policy will slow down the U.S. economy until the presidential elections in November 2024, which is likely to hurt the Democrats in particular as the party of the incumbent.

Fiscal policy, on the other hand, is likely to be much more passive. The opportunity for Biden to boost the cooling economy by increasing spending will probably be limited. The Republicans will probably try to put the brakes on Joe Biden’s plans, which is likely to paralyze political activity to some extent. In view of the arguably too extensive and inflation-driving fiscal packages during the pandemic, a more passive fiscal policy can certainly be viewed positively from a macroeconomic perspective. However, there is also a downside: a recession without a simultaneous fiscal stimulus will make the economic situation more difficult for many people and the election campaign even more heated than is already to be expected. There is also a risk that the regularly scheduled increases in the debt ceiling for the federal budget will once again become the plaything of party interests, increasing the risk of default.

The political paralysis and the two years until the uncertain outcome of the U.S. presidential election come at an inopportune time for the European economies. They are already being jolted by the energy crisis, dramatically high inflation and the cooled global economy. All in all, the U.S. economy is less affected by these factors, and it has also digested the pandemic-related economic slump better than the euro zone. For example, U.S. economic output returned to the pre-crisis level of late 2019 as early as the early summer of 2021, whereas this was not the case in the euro area until the end of 2021 and in Germany, for example, until the summer of 2022.

In addition to all the other burdens on the European economies, there is now uncertainty about the political course of the United States after the upcoming presidential elections – for example, with regard to the future of transatlantic trade relations, support for climate policy goals or the military umbrella for Europe. Such uncertainties could, for example, reduce companies’ propensity to invest and further dampen the already gloomy economic outlook. However, the threat of weak economic development makes it more difficult in Europe to finance the energy turnaround or infrastructure renewal. In the USA, too, investment is needed in the energy turnaround and infrastructure; under Joe Biden, the US government has already made substantial financial resources available for this in the coming years. Against this backdrop, the looming political paralysis until the presidential elections is manageable for the USA in terms of economic policy. Or to paraphrase an old saying of former U.S. Treasury Secretary John Connally from 1971: While the upcoming presidential elections are extremely important, especially for the U.S. itself, they will also be a major problem for Europe because of their great significance and the uncertainties surrounding the outcome.

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