BENGALURU – Global economic growth is forecast to barely clear 2 per cent in 2023, according to a Reuters poll of economists who said the greater risk was a further downgrade to their view, at odds with widespread optimism in markets since the start of the year.
Falling energy prices, a slowdown in inflation in most economies from multi-decade highs, an unexpectedly resilient euro zone economy and China’s economic reopening have led traders to speculate that the downturn will be more mild.
This has driven MSCI’s all-country world index of shares up nearly 20 per cent from October lows, hitting a five-month closing high on Tuesday, despite the greater risk that central banks will keep interest rates higher for longer rather than cut them.
But economists as a whole were much less upbeat, paring back growth forecasts for this year and next from 2.3 per cent and 3 per cent respectively in an October 2022 poll to 2.1 per cent and 2.8 per cent. Their more dour mood flew in the face of some notable upgrades by banks in recent weeks.
The 2023 growth forecast is well behind an International Monetary Fund forecast of 2.7 per cent that was issued in October and is due to be updated next week. The latest Reuters polls of more than 500 economists covering 45 economies were taken from Jan 5 to Jan 25.
More than two-thirds of respondents, 130 out of 195, said the greater risk to their world growth outlook was that it would be even slower than what they currently expect.
Much will depend on how much success the world’s major central banks can claim from roughly a year’s worth of historically aggressive interest rate hikes that are not over yet. The full impact of rate hikes can take a year or more to show up in economies.
“The market continues to price for a dream scenario of inflation having peaked, then coming down sharply, but not overshooting to the downside,” said market strategists at Rabobank, based on relatively good news in data released in the first weeks of this year.
“However... the range of scenarios ahead is truly broad, and yet the market seems to have settled for a happy median that seems the least likely to transpire.”
Consensus gross domestic product growth forecasts for 2023 for more than 80 per cent of economies surveyed were downgraded from the October poll.
Inflation predictions for 2023 in nearly 80 per cent of economies surveyed, 35 out of 45, were upgraded from the October poll, suggesting the bias was for global central banks to maintain a tighter monetary policy for an extended period of time.
At the same time, unemployment rates were not expected to climb much from relatively low levels. This suggests central banks have no room to even consider lowering rates any time soon.
Nearly all major central banks were expected to hold interest rates steady till the end of this year, a conclusion also at odds with rate futures, which expect easing in the fourth quarter.
The European Central Bank (ECB), the United States Federal Reserve and the Bank of England (BOE) were expected to hike rates at each of their next two policy meetings and hold them steady.
While the ECB was expected to deliver larger 50-basis-point hikes, the Fed was forecast to go for smaller 25-basis-point rate rises.
The BOE was forecast to lift its bank rate by 50 basis points to 4 per cent on Feb 2 and then deliver a quarter-percentage-point hike in March before pausing.
“We see good reasons to believe that the global economy still has a tough year ahead,” economists at Citigroup said. “High inflation and tight monetary policy look likely to plague the outlook, and we would not be surprised to see renewed tightening in global financial conditions in the coming months.”
When asked to list the biggest threat to global economic growth in 2023, more than 85 per cent of economists, 171 out of 196, were split nearly evenly between tighter monetary policy (90) and persistently higher inflation (81).
Fifteen pointed to the Russia-Ukraine war, eight nodded to an asset price correction, one said a resurgence of Covid-19, and one said weaker-than-expected labour markets. REUTERS