Global Economy Slows, but Seems to Be Faring Better Than Feared
A weak start to 2023 is expected in many rich countries, but U.S. and European slumps could be relatively short
A weak start to 2023 is expected in many rich countries, but U.S. and European slumps could be relatively short
The global economy continued to deteriorate as 2022 draws to a close, but not as severely as economists previously feared, raising the possibility the world could avoid a deep slump next year.
Business surveys released Wednesday pointed to declines in output across the U.S. and Europe’s largest economies in November. But the figures and other economic readings pointed to a mixed outlook, with some parts of both economies continuing to show resilience despite high inflation and rising interest rates.
In China, the world’s second-largest economy, the outlook is highly uncertain as the country faces a surge in Covid-19 cases. Economists expect a rebound in growth next year as Beijing attempts to ease tough pandemic policies.
A tight U.S. labour market and still strong household balance sheets are supporting consumer spending, the economy’s main engine. A healthy consumer helped power retail sales in October and could keep the world’s largest economy growing at the end of this year. The U.S. outlook depends in part on how it weathers the Federal Reserve’s interest-rate increases aimed at cooling inflation that is running near a 40-year high.
Europe is experiencing less economic disruption from Russia’s decision to limit energy supplies than analysts earlier feared. Many households and businesses in the region are adapting by, for instance, cutting back on energy consumption, said Adam Posen, president of the Peterson Institute for International Economics. European governments also distributed larger-than-anticipated sums of fiscal support to households to help address rising energy and food costs, he added.
“We’re going to end up with more than 75% of the world’s economy actually doing pretty well,” Mr. Posen said. The U.S. and European Union “are likely to have relatively short, not terrible recessions and return to growth possibly by as early as the fourth quarter of 2023.”
Still, many developing countries are falling behind. David Malpass, the head of the World Bank, earlier warned developing countries face an additional economic risk: Policies adopted by advanced economies to address inflation and economic slowdown could leave insufficient capital for poorer nations.
S&P Global said its composite output index for the U.S., which includes services and manufacturing activity, fell to 46.3 in November from 48.2 a month earlier, among the quickest contractions since 2009. An index below 50 signals contracting economic activity, while above 50 signals growth.
“Companies are reporting increasing headwinds from the rising cost of living, tightening financial conditions—notably higher borrowing costs—and weakened demand across both home and export markets,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
U.S. businesses reported that inflationary pressures eased in November, however, with prices for materials and freight costs cooling.
The economic cost of higher energy prices was evident in surveys of purchasing managers at European businesses, which recorded another month of declining activity in November. S&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 mark that distinguishes a contraction from an expansion.
The global economic outlook remains highly uncertain. One big question in the U.S. is how quickly inflation comes down. The pace at which it does will help determine how high the Fed raises interest rates and how long it keeps them there. The central bank has raised rates at the fastest pace since the 1980s this year. Many economists expect higher borrowing costs to hurt spending with greater force in the coming months, threatening U.S. growth.
Fed staff early this month saw a U.S. recession next year “as almost as likely” as their baseline projection of weak growth, according to minutes of the policy makers’ Nov. 1-2 policy meeting released Wednesday. That represented a downgrade of the economic outlook due to the tightening in financial conditions that had occurred this fall.
Europe’s economies face the strongest economic headwinds in the months ahead. Russian natural-gas giant Gazprom PJSC on Tuesday threatened to further throttle exports to Europe via Ukraine from next week, putting in question one of the last remaining routes for Russian gas to reach Europe.
A reduction in Covid-19 restrictions in China is key to an expected rebound in growth there next year, but the recent surge in infections has raised questions about how quickly that can proceed.
“This fine-tuning of its Covid-19 policy is now being tested as cases continue to climb, especially in its manufacturing hub of Guangzhou,” said Magdalene Teo, head of fixed income research in Asia for Julius Baer. “China is realising that reopening this winter will not be easy.”
Many forecasters see global output rising by around 2% next year. That would be a sharp deceleration from this year and well below its 3.3% average in the decade leading up to the start of the Covid-19 pandemic, but still producing a small rise in output per person.
Even with a weak start to 2023 expected in many of the world’s richest countries, economists are wary of forecasting a global recession.
“Even though we do not formally forecast a global recession from a narrow technical viewpoint, it will feel like one for large parts of the global economy,” said Marcelo Carvalho, global head of economics at BNP Paribas.
In practical terms, this means the hardship many nations, businesses and consumers around the world have experienced this year—with strong regional variations—isn’t over.
The U.S. is expected to eke out meagre gains next year. The Organization for Economic Cooperation and Development projects U.S. economic output will grow at an annual rate of 0.5% in 2023, down from an estimated 1.8% in 2022. Economists surveyed by the Wall Street Journal think U.S. gross domestic product will grow at an annual rate of 0.4% in 2023, and they see a rising chance for a recession in the next year.
Europe seems likely to avoid the worst outcomes from energy disruptions. A mild October and high levels of gas storage make it less likely that Europe’s factories will face energy rationing. As a result, economists at Barclays expect a 1.3% drop in gross domestic product there, less than their worst-case scenario of a 5% decline.
While conditions could start improving next year, economists warned the global economy remains in a precarious position.
“The risks that things could go wrong are increasing compared to where they were in the past few months,” said Alvaro Pereira, acting chief economist at the OECD.
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Continued stagflation and cost of living pressures are causing couples to think twice about starting a family, new data has revealed, with long term impacts expected
Australia is in the midst of a ‘baby recession’ with preliminary estimates showing the number of births in 2023 fell by more than four percent to the lowest level since 2006, according to KPMG. The consultancy firm says this reflects the impact of cost-of-living pressures on the feasibility of younger Australians starting a family.
KPMG estimates that 289,100 babies were born in 2023. This compares to 300,684 babies in 2022 and 309,996 in 2021, according to the Australian Bureau of Statistics (ABS). KPMG urban economist Terry Rawnsley said weak economic growth often leads to a reduced number of births. In 2023, ABS data shows gross domestic product (GDP) fell to 1.5 percent. Despite the population growing by 2.5 percent in 2023, GDP on a per capita basis went into negative territory, down one percent over the 12 months.
“Birth rates provide insight into long-term population growth as well as the current confidence of Australian families,” said Mr Rawnsley. “We haven’t seen such a sharp drop in births in Australia since the period of economic stagflation in the 1970s, which coincided with the initial widespread adoption of the contraceptive pill.”
Mr Rawnsley said many Australian couples delayed starting a family while the pandemic played out in 2020. The number of births fell from 305,832 in 2019 to 294,369 in 2020. Then in 2021, strong employment and vast amounts of stimulus money, along with high household savings due to lockdowns, gave couples better financial means to have a baby. This led to a rebound in births.
However, the re-opening of the global economy in 2022 led to soaring inflation. By the start of 2023, the Australian consumer price index (CPI) had risen to its highest level since 1990 at 7.8 percent per annum. By that stage, the Reserve Bank had already commenced an aggressive rate-hiking strategy to fight inflation and had raised the cash rate every month between May and December 2022.
Five more rate hikes during 2023 put further pressure on couples with mortgages and put the brakes on family formation. “This combination of the pandemic and rapid economic changes explains the spike and subsequent sharp decline in birth rates we have observed over the past four years,” Mr Rawnsley said.
The impact of high costs of living on couples’ decision to have a baby is highlighted in births data for the capital cities. KPMG estimates there were 60,860 births in Sydney in 2023, down 8.6 percent from 2019. There were 56,270 births in Melbourne, down 7.3 percent. In Perth, there were 25,020 births, down 6 percent, while in Brisbane there were 30,250 births, down 4.3 percent. Canberra was the only capital city where there was no fall in the number of births in 2023 compared to 2019.
“CPI growth in Canberra has been slightly subdued compared to that in other major cities, and the economic outlook has remained strong,” Mr Rawnsley said. “This means families have not been hurting as much as those in other capital cities, and in turn, we’ve seen a stabilisation of births in the ACT.”
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