Celebrate well this New Year. More fireworks in 2023 await
There are fears that 2023 is on the way to becoming the third-worst year for global growth in the 21st Century, behind only 2020, a pandemic year, and 2009 the last true global financial crisis.
The Institute of International Finance (IIF) said global growth in 2023 is expected to be weaker than the Global Financial Crisis of 2009, with Russia and Ukraine causing massive contractions to the rest of the world economies.
Last October, the IMF said that Global growth is forecast to slow from 6 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. If that’s the case, then there won’t be a recession next year. However, a broad-based slowdown in the global economy, for sure.
The China syndrome
China, the world’s second-biggest economy (GDP of $17.7 trillion compared to the US’s $23 trillion) has suffered from an on-again off-again policy of zero Covid lockdowns, and property-sector crises, leading to severe weaknesses in consumption and mobility.
China recently abandoned its COVID policy and is bracing for its older residents, the least vaccinated of the general population, to overcrowd hospitals in case vaccine variants overwhelm the healthcare system.
China had a medium-term growth of 6%, but the IMF shrunk it down to 4.6%, and in January expects to downgrade that even further.
A few months back, the World Bank warned about rising risks of a global recession in 2023 saying the world’s three largest economies – the US, China, and the Eurozone have experienced sharp slowdowns where a slight hit to the global economy over the next year could tip it into recession.
World Bank, IMF, and US warnings
In late September, World Bank President David Malpass warned of stagflation and global recession confronting the global economy.
Also in September, the World Bank repeated the threat stressing that global central banks’ war against inflation could do the dead.
Last July, IMF Chief and Managing Director Kristalina Georgieva said the outlook for the global economy had “darkened significantly” and could not rule out a possible global recession next year.
US Treasury Secretary Janet Yellen recently predicted a significant reduction in inflation by the end of 2023, unless there was an unanticipated shock, while also pointing at a continued risk of a recession despite a “healthy banking system” and a “healthy business and household sector.”
Debt and food crises
Global debt fell to represent around 20 percent of global GDP but is still above pre-pandemic levels in 2021 when it reached a record $235 trillion last year.
Food prices reached a record earlier this year, straining government budgets with rising food import bills.
Up 19.5% year-on-year, world food prices hit an all-time high in January 2022, according to the UN’s Food and Agriculture Organization (FAO). The FAO food price index (FFPI) was at 135.7 points, up 22.2 points from January 2021.
The scale of the food crisis was analyzed by the IMF last October in the latest World Economic Outlook, showing that a 1 percent drop in global harvests raises food commodity prices by 8.5 percent.
However, it also showed that a 1 percentage point increase in the Federal Reserve’s main interest rate reduces food commodity prices by 13 percent after one quarter, as higher rates discourage inventory holdings and reduce speculative activities in commodity futures markets, thus putting downward pressure on food prices.
Paths to recession
The real economy can run into a recession if more shocks begin to crush people’s and enterprises’ confidence, creating lower spending, and altering investment plans. This could lead to cascading effects globally but depending on the type of shocks, some economies can bounce back but others not as easily.
Also, policy recessions happen when global central banks raise rates too fast, for too long, cuffing financial conditions and the economy. The alternative is an even bigger inflation problem.
The worst kind of financial recession happens when shocks, like a property crisis, stagger banking systems. These result in lasting damage to balance sheets, confidence, and spending.
CFRA chief investment strategist Sam Stovall said investors should brace for volatility in H1 2023, adding the Fed could slow down its pace of rate hikes in H12023, before stopping tightening measures by Q3.
Read more: Fitch reduces global growth forecast due to rapidly rising prices
“We expect a mild recession, based primarily on the strength of employment,” Stovall wrote. “We see the market recovering in the second half as we project the Fed to finish raising rates by late Q1 / early Q2, and pausing through Q3 2023.”
Oil-producing countries, especially those in the GCC, benefitted from a sharp rise in crude prices leading to a GDP boost. In early December 2022, Brent crude oil price stood at $82.7 per barrel, compared to $77 for WTI oil. Last May, Brent topped the $130 mark before settling back to the $120s and later $100s.
This hydrocarbon GDP increase is not likely to repeat in 2023 amid potential OPEC+ production cuts but this means that oil prices will remain high and help support spending even as private sector investments decrease as monetary policy continues to tighten in the region, following in Fed footsteps.
Citing an ICAEW (Institute of Chartered Accountants in England and Wales) report, UAE’s GDP growth will slow to 2.7 percent in 2023 but the non-oil sector will grow by 3.9 percent, lower than previous estimations but still a bright light when compared to several developed economies forecast to be in recession.
The PwC Middle East Economy Watch in Q3 also puts 2023 growth at 2.7%.
A recently released AI-powered report by Iridium Advisors, a Dubai-based consultancy, said that its GCC Earnings Call Sentiment Index dropped 8% QoQ to its lowest point since Q1 2021, reflecting GCC company feelings towards earnings in Q3 2022. UAE and Kuwait bucked the trend and showed a minor increase in sentiment.
The report said regional equity markets are not spared the effect of larger global market contractions, caused by rising interest rates, oil price volatility, and recession worries.
Real estate was noted as possessing an increase in sentiment, while chemicals, construction materials, and related materials saw the largest decline.