The International Monetary Fund (IMF) has estimated that global growth will decline to 2.7% in 2023, the weakest year for the world economy since 2001, excluding the global financial crisis and the worst stage of the pandemic.
In November, the IMF cautioned that the outlook had become even more "gloomy" since their previous forecast.
The likelihood of a global recession occurring in the coming year may depend on three key factors: the actions of central banks, the effects of China's reopening, and energy prices. Central banks are also an important factor to consider.
Central banks
Central banks around the world are closely monitoring inflation, which the International Monetary Fund (IMF) has identified as the "most immediate threat to current and future prosperity". While inflation has started to decrease in the US and Europe due to lower energy prices and the effects of higher interest rates, central banks have indicated that they plan to continue raising rates, although at a slower pace.
Central bankers are making decisions on a meeting-by-meeting basis as they analyze the latest data, and have emphasized that they are unsure of how high they will need to raise rates or how long they will need to maintain these levels in order to bring inflation back to around 2% and keep it there. If prices continue to rise at a faster rate than desired, central banks may take more aggressive action, potentially placing additional stress on the global economy.
China
The Chinese government's decision to ease Covid-19 restrictions, which have been in place for almost three years, has the potential to boost economic growth, but also carries risks.
As the world's second-largest economy reopens, there is a risk of setbacks occurring if openings are premature and healthcare systems become overwhelmed, as has been seen in other countries. Despite the current surge of coronavirus infections in China, the government is proceeding with plans to loosen rules, including dropping quarantine requirements for international arrivals starting in early January.
Other countries, however, are imposing restrictions on travelers from China, due to concerns about the emergence of new virus variants.
Energy Prices
Energy prices are another factor that could influence the global economy in the coming year. The ongoing conflict in Ukraine, led by Russian President Vladimir Putin, has added uncertainty to forecasts, particularly for European countries that are reducing their dependence on Russian energy but may still face shortages.
A report from the International Energy Agency has warned that Europe could experience a natural gas shortage in 2023 if Russia cuts off all gas exports to the region and temperatures become colder. There is also the possibility of an increase in energy demand from China as its economy recovers.
The Organization for Economic Cooperation and Development (OECD) has indicated that its latest economic projections could be revised if energy shortages drive prices higher or if European governments need to implement rationing to lower demand for gas and electricity this winter and next.
- Regardless of whether a global recession occurs, the next year is expected to be difficult, with Citi Private Bank's Head of Investment Strategy and Economics in Europe, the Middle East, and Africa, Guillaume Menuet, predicting the slowest economic growth in the last 40 years, with the exception of 2020 and the 2007-2008 financial crisis.
- Even if a global recession is avoided, many countries could still experience downturns with accompanying increases in unemployment, though the severity and duration of these downturns is a point of disagreement among economists.
- The International Monetary Fund (IMF) has warned that the slowdown "will be broad-based" and may "reopen economic wounds that were only partially healed post-pandemic," and that "for many people 2023 will feel like a recession.
It also predicted that:
- India is expected to reach a GDP of $10 trillion by 2035 and become the world's third largest economy by 2032.
- Over the next 15 years, the UK is predicted to remain the world's sixth largest economy and France the seventh largest, but the UK is no longer expected to grow at a faster pace than other European countries due to a lack of policies that promote growth and an unclear vision of the country's role outside of the European Union, which have reportedly slowed growth.
- However, the global economy is still far from the $80,000 per capita GDP level at which carbon emissions become uncoupled from growth, which means additional policy interventions will be necessary to reach the target of limiting global warming to 1.5 degrees above pre-industrial levels.
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