Global Economic Outlook 2023

2022 will be remembered as the year of the return of inflationary pressures – which went from a “transitory” phenomenon to a persistent one. Likewise, the year that just ended also marked the end of an era of ultra-expansionary monetary policy and the beginning of an upward cycle that led the main central banks to raise their rates considerably.

The Fed embarked on its most aggressive cycle in 40 years by raising its benchmark interest rate by 4.25 percentage points to a 4.25-4.50 percent range. Additionally, 2022 was also marked by the withdrawal of fiscal stimuli implemented in much of the developed world to cushion the shock of the pandemic.

In this context, 2022 ends with lower economic growth than initially expected and with a complicated outlook for 2023. The global economy should end 2022 with growth very close to 3%, a figure considerably lower than the estimate of 5% at the beginning from last year. The blocks that contributed the most to the slowdown were the United States (EU) and China, which experienced growth well below what was initially expected.

Although the growth figures were disappointing, the most significant surprise came from the inflation side, where the specialists erred monumentally. At the beginning of 2022, the consensus was that global inflation had reached its peak in 2021 and that in 2022 we would see a considerable decrease in this indicator.

The thesis was that inflation had been mainly caused by the disruptions generated by the pandemic in global supply chains in combination with a sudden and accelerated reactivation of aggregate demand driven by the reopening in conjunction with monetary and fiscal stimuli.

However, the Russian invasion of the Ukraine introduced a new supply shock in the markets for food and energy raw materials that put an end to the thesis of a decrease in inflation. Far from abating, inflation continued to rise, setting new highs month after month. This situation forced central banks to finally conclude the largest monetary experiment in history, which began in 2008 with the arrival of the Great Recession.

For the first time in almost 15 years, the priority of the economic authorities went from stimulating growth to controlling inflation. In this context, the outlook for 2023 looks complicated and the global economy could experience its weakest growth rate in decades. Specialists anticipate that the global economy could slow down from a rate close to 3.0% in 2022 to 1.7% in 2023.

The slowdown is practically generalized. Specialists expect a contraction in GDP for the euro zone (main victim of the crisis of energy raw materials generated by the invasion of Ukraine) and also in the United Kingdom. Meanwhile, the US economy could enter a recession for part of the year, although it would end with positive growth.

The main trading partners of the US, Mexico and Canada, would also experience a sharp slowdown. Specialists anticipate a considerable slowdown for Japan and the rest of Asia (excluding China). China could be the only G20 country to experience growth in 2023 that is higher than in 2022. Specifically, China experienced its worst performance in the last 40 years during 2022, with growth of just 3.3 percent.

The weakness was mainly attributable to the ironclad “Zero Covid” policy implemented by the Chinese government, which finally came to a conclusion in December. The reopening of activities is the main factor behind a growth forecast of close to 4.5% for China in 2023. The most important challenge for the global economy this year will be the fight against inflation without generating profound damage to growth and employment .