Home > Business > 2023 global economy to be shaped by high inflation and geopolitics

2023 global economy to be shaped by high inflation and geopolitics

High inflation and low growth are expected to mark the global economy in 2023. However, it will cope better than initially expected with the consequences of the war in Ukraine, sharp price increases and higher interest rates, according to Munich Re’s Economic Outlook for 2023.

Chief Economist Michael Menhart commented: “The global economy is different from that of pre-Covid and pre-war times, and it will likely stay that way for quite a while. With inflation, higher interest rates, government interventions and geopolitical risks shaping the outlook. On the positive side, we can now say that the forecasts do not look as grim as many had expected half a year ago.”

Leading economic indicators suggest that global economic growth is going to be relatively low this year, Munich Re’s experts have pointed out – though both the general mood and published economic data have improved somewhat in recent weeks.

Economic growth in Europe and the US will be weak, and will likely experience stagflation, i.e. almost zero real economic growth combined with high inflation. Relatively robust labour markets, however, should prevent the economy from slipping into an actual recession. Real growth in the US and the eurozone could then rise again to above 1% in 2024, experts noted.

In industrialised countries in particular, according to the report, high inflation and falling real incomes are putting a noticeable strain on demand for consumer goods. Moreover, the strong recovery experienced in consumption following 2020’s Covid-19-induced recession is now slowing to a stop. As for companies, less favourable financing conditions owing to higher interest rates are impeding investment.

Munich Re experts concluded that global economic growth in 2023 will thus be driven almost exclusively by emerging markets. China will resume its role as the engine of global growth, however, the consequences of the intense Covid-19 wave and problems in the real estate market will continue to hamper the country’s economic development.

While growth is expected to recover somewhat compared to 2022 (3.0%), at 4–5% it will remain far from the growth rates seen in the past, the report highlighted. The Russian invasion of Ukraine has also had a big impact in the global economy, this has resulted in the energy and commodity markets becoming a decisive factor and highly influential.

Fears that the supply of natural gas in Europe could be restricted and that a severe recession could be imminent have proved to be unfounded, so far. The effects of last year’s record energy prices will continue to leave their mark on growth and inflation rates in 2023, especially in Europe, Munich Re highlighted.

Moreover, the experts warned, a reliable supply of natural gas for Europe in the winter of 2023/24 is by no means guaranteed as things stand. Added to these issues are the increased tensions between the US and China as well as within the Middle East, which could have a significant impact on the economic outlook.

While inflation is falling in many industrialised countries, it will remain high in advanced economies – although in most cases it is now falling again, a trend that is expected to continue in the course of 2023. According to Munich Re, it is expected that price increases will in 2024 still remain well above the target set by major central banks.

Persistently high inflation and economic stagnation create a credibility dilemma for central banks. Two factors are decisive, Munich Re noted, firstly, whether the central banks are prepared to raise interest rates further if necessary. And secondly, whether they are successful in combating inflation without triggering a recession.

Menhart said: “Inflation remains challenging. While overall inflation numbers are turning downwards, underlying inflation pressures continue to be elevated for most of the advanced economies. We now assume that inflation will stay above central bank targets well into the year 2024.

“Altogether, this creates a credibility dilemma for central banks. Will they be ready for as many great hikes as necessary and will they succeed in bringing down inflation without inducing a recession? This is even more relevant for the European central bank, which started raising rates later than the US Fed, and which also faces more uncertain inflation dynamics in the eurozone.”

This outlook is influenced by significant risks including, in particular, a further escalation of the Russian war of aggression against Ukraine with renewed price shocks for energy and commodities, a potential recession as a consequence of central banks raising interest rates too sharply, or a prolonged uncontrolled Covid-19 wave in China.

Source: Reinsurance

Post navigation

Leave a Comment

Leave a Reply