The war in Ukraine, high food and energy prices, the fight against inflation, the looming recession, the transition to renewable energy, and China’s uncertain post-pandemic path present just some of the entangling challenges that will preoccupy the global economy in the following years, according to Allianz Global Economic Outlook.
After a tumultuous year, we anticipate lackluster growth in 2023, followed by differing recovery paths across countries in 2024. Global growth is likely to slow to +1.4% in 2023 (-0.1pp downside revision) and to recover modestly to +2.8% in 2024, with significant divergence across countries. Advanced economies will register a shallow recession of -0.1% in 2023 (after growth of +2.5% in 2022), followed by a rebound to below-potential growth of +1.5% in 2024.
Europe will muddle through the ongoing energy crisis, while the US recovery is constrained by a cautious policy mix. Among emerging markets, growth is expected to remain stable in 2023 at +3.3% – mainly supported by the cautious reopening of China, while most other emerging countries are likely to slow down due to both external and domestic headwinds. A rebound to +4.3% is expected in 2024, supported by the policy pivot as well as the recovery of Chinese demand.
In 2023, we forecast a mild recession in Europe due to the energy crisis and in the US from abrupt monetary and financial normalization. This recession will test resilience. Stronger balance sheets, demand backlog, and fiscal support will limit damage. Emerging markets expect stable growth in 2023. Recovery in the US is anticipated for 2024, while the eurozone may face ongoing challenges due to energy issues.
Europe faces continued energy challenges. Record gas storage and energy efficiency gains prevented a blackout in 2022, but the outlook for winter 2023-2024 remains limited. Substitution for Russian gas imports will not suffice, creating negative confidence effects and testing fiscal capacities to cushion high electricity prices. Policymakers must enhance energy efficiency and stabilize gas consumption beyond short-term savings to avoid risks similar to 2012 and potential European fragmentation, according to AI investment market strategy.
Geopolitics have become a significant concern. The US faces a split Congress and protectionist measures through the Inflation Reduction Act. Europe’s policies addressing energy crisis competitiveness shocks include sovereignty and re-industrialization efforts. China’s balancing act to exit zero-Covid and upcoming elections will require investors and corporations to adopt coping strategies and buffers.
Changes in China’s containment measures will ease pressures on slowing global trade and reduce producer prices. A domestic post-Covid rebound could start in the second half of 2023 and continue into 2024, benefiting the global economy if sanitary restrictions ease as expected. Setbacks could impact global trade and delay easing inflationary pressures.
Emerging markets face varied challenges. Latin America sees rising political risk, Eastern Europe is hit hard by the energy crisis, and global commodity importers contend with a strong dollar and high energy and food prices. Credible policies will be crucial. Debt sustainability concerns grow with increasing rates and capital flight to safety.
Central banks aim to fight inflation and prevent it from becoming entrenched. While the current rate hike path is moderating, central bank independence will be tested. Risks include maintaining restrictive monetary stances despite looming recession or prematurely easing and risking stagflation. Moderate quantitative tightening and decreasing liquidity pose risks of policy mistakes.
Fiscal spending remains critical in the fight against the virus and Russia. It will continue to address relief measures, living cost crises, and green industrial policies. More targeted aid and fewer distortions are necessary to avoid selective financial markets.
Capital markets faced significant corrections in equities and fixed income. Earnings forecasts appear overly optimistic, and even a mild recession is not fully priced in. Fixed income markets carry risks. As central banks drain excess liquidity and trading volumes decline, financial accidents must be monitored. After a tumultuous year, 2023 will likely see lackluster growth, with differing recovery paths in 2024. Global growth is expected to slow to +1.4% in 2023 and recover modestly to +2.8% in 2024, with advanced economies experiencing a shallow recession of -0.1% in 2023, followed by a rebound to +1.5% in 2024.
Global headwinds include still tightening global liquidity, a strong USD, elevated food and energy prices and the ongoing slowdown of Chinese demand.
Net importers of energy and food will remain particularly vulnerable to the adverse effects of the high prices for these goods on inflation, public and external finances. Central and Eastern European countries will be the most affected as they face an energy-supply crisis on top of the energy-price crisis over the winter as Russia and Ukraine were their main pre-war suppliers.
