2023: The Global Economy May Face A - Shallow Recession

Recently, the latest "World Economic Outlook" report released by the International Monetary Fund (IMF) shows that the global economy is expected to grow by 2.9% in 2023 and rise to 3.1% in 2024. The report pointed out that the global fight against inflation, the conflict between Russia and Ukraine, and the recurrence of the epidemic in China will put pressure on global economic activities in 2022. The first two factors will continue to weigh on economic activity in 2023. Could U.S. inflation be back below target in 2023? How much room does the Fed have to raise interest rates? What challenges will the euro zone economy face?

Since the fourth quarter of 2022, major countries have continued to tighten monetary policies. After the arrival of winter, new variants of Omicron have caused seasonal epidemics in various countries, and the momentum of global economic recovery has weakened. One is the lingering exogenous shocks such as geopolitics and the epidemic. As the conflict between Russia and Ukraine becomes protracted, European energy is still facing supply problems. Although the warmer weather last winter eased the energy crisis to a certain extent, Europe's industrial base has still been severely weakened. The reversal of globalization and the rise of trade protectionism will affect the global industrial chain and supply chain in the long run, threatening the stability of global trade. The new crown virus infection ended the "global pandemic", but "economic sequelae" still exist, highlighted by the long-term impact on the labor market and the withdrawal of ultra-loose fiscal and monetary policies during the epidemic prevention and control period. These exogenous destabilizing factors continue to drive up global inflation and depress global output over a longer cycle. Second, the cooling of global inflation is very slow. Except for a few manufacturing countries with relatively high margins of energy and food security, some countries that have been in deflation for a long time, and some bulk commodity suppliers abroad, the rest of the countries are still facing relatively large inflationary pressures. Inflationary pressures in the United States, the Eurozone, and the United Kingdom have marginally improved compared with the previous period, but the stickiness remains strong. Inflation is still rising in some countries, including Japan and some countries in North Africa, Central Asia and Eastern Europe. From the current point of view, even though global commodity prices have begun to fall, the rise of the global long-term inflation center is irreversible, and the era of "great moderation" of moderate growth and moderate inflation before the epidemic is gone forever. Third, most countries in the world are curbing demand with austerity policies. In the face of high inflation caused by supply shocks, countries have to cool down inflation by compressing demand. Global central banks headed by the Federal Reserve are racing to raise interest rates. Among the major economies, only China, Japan, Russia and Turkey have not raised interest rates. Fourth, global liquidity and financial conditions have tightened. Global markets are showing signs of nervousness amid rising investor risk aversion amid heightened economic and policy uncertainty. In addition, most countries raised interest rates less than the United States, triggering the return of capital, global liquidity tightening, tightening financial conditions and currency depreciation have also caused some emerging market countries to face debt difficulties.

Faced with multiple challenges under the weak recovery, the risk of recession in the world's major economies will increase in 2023, and the global economy will gradually cool down and enter the "shallow recession" range. Among them, the risk of recession in the euro zone and the United Kingdom is relatively high, while the United States will also face a moderately likely recession risk, and the resilience of its job market may provide hope for a soft landing. The economies of emerging market countries are expected to maintain moderate growth, and the pressure from a strong dollar and tight liquidity will be mainly concentrated in the first half of the year. In the second half of the year, as the monetary policies of major countries shift, the liquidity pressure in emerging markets will weaken as a whole, but different types of countries will still diverge, and risks will mainly focus on countries with high foreign dependence on energy and food and double deficits in finance and trade. It is worth mentioning that the entry of the Chinese economy into the post-epidemic era is conducive to enhancing the vitality of the global economy. It is expected that the economies of East Asia and Southeast Asia, which are more closely related to the Chinese economy, will face less threat of recession.