Global growth slowed through 2022 on a confluence of unprecedented events, fiscal and monetary tightening, China’s Zero-COVID restrictions and the Russia-Ukraine war, which led to significant declines across asset classes.
The events from last year have a profound impact on the outlook for 2023, affecting not only economic growth and inflation, but also central bank policy, interest rates, credit quality, earnings, valuations, investor sentiment, and other critical performance indicators.
On Tuesday, the World Bank has issued a revised growth forecast for 2023, which bears dire implications for the global economy. The new projection of a mere 1.7% GDP growth is the lowest recorded outside of recessionary periods since 1993 and represents a substantial decline from the June 2022 forecast of 3.0% and the 6% growth of 2021.
Furthermore, the bank forecasts a modest 2.7% growth for 2024, and an average growth rate of under 2% for the entire 2020-2024 period – the most anaemic five-year span since 1960. The bank also cautions that major slowdowns in advanced economies such as the United States and the Eurozone may portend an impending global recession.
The World Bank’s recent assessment of global economic conditions highlights that while some inflationary pressures have begun to ease towards the end of 2022, partially helped by declining prices for energy and commodities, the potential for new supply disruptions remains high.
The bank noted that core inflation may persist at elevated levels and central banks may need to adjust policy rates more drastically than currently anticipated, potentially exacerbating the already pronounced global economic slowdown.
The U.S. Bureau of Labor Statistics reported on Thursday that annual inflation as measured by the Consumer Price Index declined to 6.5% in December from 7.1% in November, and in line with market forecasts. This is the lowest reading since December 2021, encouraging hopes that the Federal Reserve will shift to smaller 25 basis point increments and could soon stop raising interest rates. On a monthly basis, the CPI declined by 0.1% following November’s increase of 0.1%.
The annual Core CPI, which excludes volatile food and energy prices, rose by 5.7% on a yearly basis in December, compared to a 6% rise in November and in line with forecasts. The monthly Core CPI rose by 0.3%, compared to a 0.2% rise in the prior month, also in line with expectations.
Despite core inflation dynamics still looking strong the U.S. dollar index dropped, as investors priced in an earlier and lower end to the Fed’s monetary tightening cycle. Nonetheless, we should bear in mind that markets have tried several times to anticipate peak rates, but so far have failed each time.
