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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Office owners are struggling with near record-high vacancy rates
First, the good news for office landlords: A post-Labor Day bump nudged return-to-office rates in mid-September to their highest level since the onset of the pandemic.
Now the bad: Office attendance in big cities is still barely half of what it was in 2019, and company get-tough measures are proving largely ineffective at boosting that rate much higher.
Indeed, a number of forces—from the prospect of more Covid-19 cases in the fall to a weakening economy—could push the return rate into reverse, property owners and city officials say.
More than before, chief executives at blue-chip companies are stepping up efforts to fill their workspace. Facebook parent Meta Platforms, Amazon and JPMorgan Chase are among the companies that have recently vowed to get tougher on employees who don’t show up. In August, Meta told employees they could face disciplinary action if they regularly violate new workplace rules.
But these actions haven’t yet moved the national return rate needle much, and a majority of companies remain content to allow employees to work at least part-time remotely despite the tough talk.
Most employees go into offices during the middle of the week, but floors are sparsely populated on Mondays and Fridays. In Chicago, some September days had a return rate of over 66%. But it was below 30% on Fridays. In New York, it ranges from about 25% to 65%, according to Kastle Systems, which tracks security-card swipes.
Overall, the average return rate in the 10 U.S. cities tracked by Kastle Systems matched the recent high of 50.4% of 2019 levels for the week ended Sept. 20, though it slid a little below half the following week.
The disappointing return rates are another blow to office owners who are struggling with vacancy rates near record highs. The national office average vacancy rose to 19.2% last quarter, just below the historical peak of 19.3% in 1991, according to Moody’s Analytics preliminary third-quarter data.
Business leaders in New York, Detroit, Seattle, Atlanta and Houston interviewed by The Wall Street Journal said they have seen only slight improvements in sidewalk activity and attendance in office buildings since Labor Day.
“It feels a little fuller but at the margins,” said Sandy Baruah, chief executive of the Detroit Regional Chamber, a business group.
Lax enforcement of return-to-office rules is one reason employees feel they can still work from home. At a roundtable business discussion in Houston last week, only one of the 12 companies that attended said it would enforce a return-to-office policy in performance reviews.
“It was clearly a minority opinion that the others shook their heads at,” said Kris Larson, chief executive of Central Houston Inc., a group that promotes business in the city and sponsored the meeting.
Making matters worse, business leaders and city officials say they see more forces at work that could slow the return to office than those that could accelerate it.
Covid-19 cases are up and will likely increase further in the fall and winter months. “If we have to go back to distancing and mask protocols, that really breaks the office culture,” said Kathryn Wylde, head of the business group Partnership for New York City.
Many cities are contending with an increase in homelessness and crime. San Francisco, Philadelphia and Washington, D.C., which are struggling with these problems, are among the lowest return-to-office cities in the Kastle System index.
About 90% of members surveyed by the Seattle Metropolitan Chamber of Commerce said that the city couldn’t recover until homelessness and public safety problems were addressed, said Rachel Smith, chief executive. That is taken into account as companies make decisions about returning to the office and how much space they need, she added.
Cuts in government services and transportation are also taking a toll. Wait times for buses run by Houston’s Park & Ride system, one of the most widely used commuter services, have increased partly because of labor shortages, according to Larson of Central Houston.
The commute “is the remaining most significant barrier” to improving return to office, Larson said.
Some landlords say that businesses will have more leverage in enforcing return-to-office mandates if the economy weakens. There are already signs of such a shift in cities that depend heavily on the technology sector, which has been seeing slowing growth and layoffs.
But a full-fledged recession could hurt office returns if it results in widespread layoffs. “Maybe you get some relief in more employees coming back,” said Dylan Burzinski, an analyst with real-estate analytics firm Green Street. “But if there are fewer of those employees, it’s still a net negative for office.”
The sluggish return-to-office rate is leading many city and business leaders to ask the federal government for help. A group from the Great Lakes Metro Chambers Coalition recently met with elected officials in Washington, D.C., lobbying for incentives for businesses that make commitments to U.S. downtowns.
Baruah, from the Detroit chamber, was among the group. He said the chances of such legislation being passed were low. “We might have to reach crisis proportions first,” he said. “But we’re trying to lay the groundwork now.”