The global economy continued to shrink as 2022 drew to a close, but not as severely as many economists feared, raising the possibility that the world could avoid a deep recession next year.
Business surveys released on Wednesday showed output declines across the US and major European economies in November. But numbers and other economic readings point to a mixed outlook, with other areas of the economy both continuing to show strength despite inflation and rising interest rates.
In China, the world’s second largest economy, the outlook is uncertain as the country faces an increase in Covid-19 cases. Economists expect growth to rebound next year as Beijing tries to ease pandemic policies.
A tight US labor market and tight housing balance sheets support consumer spending, the main engine of the economy. A healthy consumer base helped boost retail sales in October and could keep the world’s largest economy growing later this year. The outlook for the US depends in part on how it copes with the Federal Reserve’s interest rate hike aimed at cooling inflation that is near a 40-year high.
Europe is experiencing less economic disruption from Russia’s decision to cut electricity than analysts previously feared. Many households and businesses in the region are adapting, for example, to reduce energy use, said Adam Posen, president of the Peterson Institute for International Economics. European governments have distributed larger-than-expected amounts of financial support to households to help deal with rising energy and food costs, he added.
“We will conclude that more than 75% of the world economy is doing well,” said Mr. Posen. The US and the European Union “are likely to have a short, not severe recession and return to growth probably in the fourth quarter of 2023.”
Still, many developing countries are lagging behind. David Malpass, head of the World Bank, previously warned developing countries that face additional economic risks: Policies adopted by advanced economies to deal with inflation and recession can leave insufficient capital in poor countries.
IS&P Global said its US composite output index, which includes services and manufacturing, fell to 46.3 in November from 48.2 a month earlier, among the fastest readings since 2009. .
“Companies are reporting headwinds from rising living costs, tightening financial conditions – particularly borrowing costs – and weak demand across domestic and export markets,” said Chris Williamson, chief economist at S&P Global Market Intelligence.
US businesses reported that inflationary pressures eased in November, however, with commodity prices and commodity costs cooling.
The economic cost of higher energy prices was revealed in a survey of purchasing managers in European businesses, which recorded another month of declining activity in November. IS & P Global said its composite output index for the eurozone rose to 47.8 in November from 47.3 in October, but remained below the 50 points that separate contraction from expansion.
The global economic outlook remains highly uncertain. One big question in the US is how fast inflation is coming down. The pace at which it does so will help determine how much the Fed raises interest rates and how long it keeps them there. The central bank raised rates at the fastest rate since the 1980s this year. Many economists expect higher borrowing costs to hurt spending more strongly in the coming months, threatening US growth.
Fed staff earlier this month saw a slowdown in the US economy next year as “almost as likely” as their baseline forecast of weaker growth, according to minutes of policymakers’ Nov. 1-2 released on Wednesday. That represents a downgrade in the economic outlook due to the tightening of financial conditions that occurred this fall.
The European economy faces some of the strongest economic headwinds in the coming months. Russian natural gas giant Gazprom PJSC on Tuesday threatened to resume gas shipments to Europe via Ukraine from next week, calling into question one of the remaining routes for Russian gas to reach Europe.
The easing of Covid-19 restrictions in China is key to the expected growth there next year, but the latest spate of infections has raised questions about how it could continue.
“This careful adjustment of its Covid-19 policy is now being tested as conditions continue to rise, particularly in the manufacturing hub of Guangzhou,” said Magdalene Teo, head of Asia fixed income research at Julius Baer. “China understands that reopening this winter will not be easy.”
Most forecasters see global output rising by around 2% next year. That would be a sharp reduction from this year and below the 3.3% average in the decade leading up to the start of the Covid-19 pandemic, but it produces a small increase in productivity per capita.
Even if a weak start to 2023 is expected in most of the world’s rich countries, economists are wary of predicting a global recession.
“Although we are not officially reporting a global recession from a narrow technical point of view, it would sound like the main thing in the global economy,” said Marcelo Carvalho, chief economist at BNP Paribas..
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In practical terms, this means that the difficulties many nations, businesses and consumers around the world have experienced this year – and strong regional differences – do not end.
The US is expected to have a smaller profit next year. The Organization for Economic Co-operation and Development projects US economic output will grow at an annual rate of 0.5% in 2023, down from a forecast of 1.8% in 2022. Economists surveyed by the Wall Street Journal think US gross domestic product will grow at an annual rate. of 0.4% by 2023, and they see an increasing chance of a recession next year.
Europe seems likely to avoid the worst effects of the energy crisis. A cool October and high gas storage rates make it difficult for European factories to cope with energy constraints. As a result, economists at Barclays expect a 1.3% drop in gross domestic product there, below their worst-case scenario of a 5% drop.
While conditions may begin to improve next year, economists have warned that the global economy remains in dire straits.
“The risks that things could go wrong are increasing compared to where they were a few months ago,” said Alvaro Pereira, deputy chief economist at the OECD.
Amendments and Extensions
A survey of members of the European Round Table for Industry was also released. An earlier version of this article incorrectly identified it as the European Round Table of Entrepreneurs. (Revised November 23)
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