The global economic outlook brightens as inflation eases

As 2023 begins, the global economic outlook appears a bit brighter. After a 3.0% expansion in 2022, world real GDP is now projected to increase 1.9% in 2023, up from last month's forecast of 1.6% growth.

Recessions in Europe and the United States will likely be milder than previously expected, and mainland China's acceleration will be quicker following the abrupt end of its COVID containment policies. With supply conditions improving and price inflation on a downward path, the risk of a global recession—defined as an annual decline in real per capita GDP—has diminished. World real GDP growth is projected to return to 3.0% in 2024.

Substantial progress in reducing inflation is anticipated in 2023. Global consumer price inflation has already eased from a peak of 8.3% year on year in September 2022 to 7.5% in December. With a further deceleration led by goods prices, we expect global inflation to subside to 4.5% year on year in June and 3.6% in December 2023.

Many of the forces that fueled inflation have reversed, including lockdowns and supply disruptions during the COVID-19 pandemic, extraordinary fiscal and monetary stimuli, and shifts in the composition of consumer spending.

Drivers of disinflation

Monetary tightening, cooling demand, and supply chain resilience are driving disinflation. Declines in industrial commodity prices are now moving downstream to intermediate and finished goods prices. The Material Price Index by S&P Global Market Intelligence has fallen 30% from its March 2022 peak (following Russia's invasion of Ukraine) and is down 10% year on year in mid-January.

While most of the industrial materials price correction is behind us, we expect prices to drift lower in 2023 and 2024. The retreat in agricultural commodity prices is proceeding more gradually but should gain momentum in the second half of 2023, bringing relief to consumers.

Wage acceleration poses an upside risk to the inflation outlook. Unemployment rates in North America and Europe are expected to rise in 2023, slowly alleviating wage pressures. However, the legacy of the COVID-19 pandemic and retirements from an aging workforce could keep labor markets relatively tight in the major economies. In the United States, where the jobless rate is projected to rise from 3.5% in December 2022 to 5.1% in late 2023, elevated job openings imply that labor markets are much tighter than indicated by the unemployment rate.

Delayed policy easing

Interest rates are nearing their peaks, but major central banks will delay policy easing. With inflation rates still well above targets and credibility at stake, major central banks will continue to tighten policies in early 2023. In our January forecast, policy interest rates are assumed to reach highs of 5.00% in the United States, 4.75% in Canada, 4.25% in the United Kingdom, and 3.50% in the eurozone (refinance rate) this March.

We expect that these rates will remain in place throughout 2023 to dampen inflation expectations. Subsequent easing in 2024 and 2025 will bring these policy rates down to their long-run neutral levels. Monetary easing will begin in 2023 in Emerging Europe and Latin America, where central banks raised interest rates earlier and more sharply as inflation surged in 2021.

Mainland China's reopening will lift the global economy. After slowing from 8.4% in 2021 to 3.0% in 2022, real GDP growth is forecast to pick up to 5.0% in 2023 and 5.8% in 2024 before resuming a long-term slowdown. COVID-19 outbreaks appear to have peaked in most major cities sooner than we anticipated, mobility is recovering, and economic activity is accelerating from weak levels in the closing months of 2022.

Although consumer confidence remains fragile, there is potential for a consumer-led rebound given that households raised their saving rates during the pandemic. Government policy is now focused on supporting economic growth, likely through credit policies, infrastructure investments, relaxation of property sector restrictions, and an easing of regulations on technology companies. Trading partners in Asia-Pacific and beyond will benefit from recoveries in Chinese industrial production and tourism.

Mild recessions

Western Europe will avert a severe recession as energy conditions improve. We still forecast a mild, two-quarter recession as high inflation erodes household incomes and financial conditions tighten. Yet, the risk of severe, energy-induced contractions in output has decreased thanks to temperate early winter weather, high natural gas storage levels, and lower energy prices. After an estimated 3.4% increase in 2022, eurozone real GDP is projected to edge up 0.2% in 2023, followed by 1.5% growth in 2024.

The US economy enters a mild downturn. Real GDP likely increased at a 2.3% annual rate in the fourth quarter of 2022 with support from inventory accumulation and gains in consumer spending and business equipment investment. However, declines in retail sales and industrial production in November and December suggest the economy is on a downward trajectory heading into 2023.

We continue to forecast a recession in the first two quarters of 2023, led by an inventory drawdown and declines in residential investment, commercial construction, and consumer spending on goods. Several forces will limit the severity of the recession: Household finances are in good shape, automotive production will increase as microprocessor supplies recover, and dollar depreciation will support net exports. After slowing from 2.0% in 2022 to 0.5% in 2023, US real GDP is projected to increase 1.8% in 2024.

Even with mild recessions in Europe and North America, the global economy will avert a recession. With an acceleration in mainland China and sustained moderate growth in the emerging markets of Asia Pacific, the Middle East, and Africa, world real GDP is expected to increase 1.9% in 2023, a pace that falls short of potential. Monetary tightening will succeed in cooling inflation, allowing interest rates to retreat and global growth to pick up to a 3.0% pace in 2024 and 2025.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.