The global economy is approaching a recession as economists polled by Reuters once again cut growth forecasts for major economies, while central banks continue to raise interest rates to cushion high inflation.
One bright spot is that most major economies that are already in recession or heading towards one are starting out with relatively low unemployment compared to previous recessions. In fact the latest survey expects the smallest gap between the growth rate and unemployment to be the smallest in at least four decades.
But while it may reduce the intensity of the recession – most respondents say it will be smaller and shallower in major economies – that could keep inflation higher for longer than currently expected.
Most of the top global central banks exceed two-thirds of the expected terminal interest rate, but with inflation still far beyond their mandate, the risk is that rate expectations are too low.
After being of late to address the inflation problem, global central banks have spent much of this year catching up on rate hikes. Most economists and central banks believe there will be little work to do next year.
The “global recession risk” is what everyone is talking about and has become mainstream in forecasts, said Michael Avery, global strategist at Rabobank. “I think it’s a lot of no-brainer when you look at the trend in all the major economies.”
Given the low unemployment rate is problematic, Hare said, because it is a lagging indicator and “the longer it stays strong the more central banks feel they can continue to raise rates.”
Of the 22 central banks polled this time, only six were expected to reach their inflation target by the end of next year. This was a drop compared to the July surveys, where two-thirds of the 18 were expected to achieve their respective targets by then.
Deutsche Bank analysts wrote: “…History never quite repeats itself, but since inflation forecasts have generally been so poor over the past 18 months, it is worth asking what usually happens when Inflation breaks these limits. The answer is that it is normally quite sticky.”
Meanwhile, global equity and bond markets are in disarray, while the US dollar is at a multi-decade peak in foreign exchange markets based on US rate expectations.
A 70 percent majority of economists, 179 out of 257, said the likelihood of a sharp rise in unemployment in the coming year was minimal, underscoring how widespread the view among forecasters is that it will not be a catastrophic recession.
According to a Reuters poll of economists covering 47 major economies from 26 September – 25 October, global growth this year is projected to be 2.9 per cent in 2023, compared to an expected 2.3 per cent, followed by a rebound to 3.0 per cent in 2024.
They were all downgrades from the elections held in July.
More than 70 percent of economists, 173 out of 242, said the cost of living crisis in the economies they cover would worsen over the next six months. The remaining 64 expected improvement in it.
While the inflation cycle is global in nature, worsened by the sudden rise in energy prices after Russia invaded Ukraine on February 24, much will depend on how far the US Federal Reserve can push rates.
The Fed is expected to hike interest rates by 75 basis points for the fourth time in a row on November 2, and economists say it should not stop until inflation is nearly half its current level.
China, the world’s second-largest economy, was expected to grow by 3.2 percent in 2022, well below the official target of about 5.5 percent and well below the pre-pandemic growth rate.
Barring a 2.2 per cent expansion after the initial COVID-19 hit in 2020, this would be the worst performance since 1976.
India’s economy was also projected to grow well below its potential over the next two years, with an average showing growth of 6.9 per cent in the 2022-23 fiscal year and 6.1 per cent the following year.
The euro zone economy was expected to grow 3.0 percent this year, but flatline in 2023 before expanding to 1.5 percent in 2024.