Which issues will rule global economy in 2023? After a year of major shocks with the return of inflation and monetary tightening, the time has come to turn to 2023, which should be a two-stage transition year: the first half being under the sign of disinflation and the second half allowing us to anticipate the major trends of 2024 . A real dynamism throughout the year, which will therefore influence the decisions of households, businesses and also financial markets.
The OECD team presents its focus on 2023.The year is starting off with contrasting signs in the eurozone, between hope of disinflation and fear of recession.
In Q4 2022, China’s economic growth slowed to 2.9% year-on-year (y/y) from 3.9% in Q3. In quarter-on-quarter terms, activity stagnated. Our Pulse below highlights a broad-based weakening in economic activity during the last quarter of 2022.
Outlook for GDP growth, inflation, interest rates and exchange rates
The latest economic indicators updated on January 23, 2023 and the coming calendar
Where do we stand regarding the debate on the possible triggering of a wage-price loop in the Eurozone? About six months ago, when the debate first arose, there was some presumption but no tangible evidence that such a loop had been set off. Today, we have first signs that a wage-price loop is underway but in a somewhat normal way and with a limited risk of a problematic spiral.
Over the past few months, the equity markets of the main emerging financial centres have shown a little more optimism. They are betting on a recovery in growth in China after the lifting of health restrictions, on the positive effect of the drop in commodity prices for importing countries and on the impact of US monetary tightening and the appreciation of the dollar to be less severe than expected. The first two arguments are uncertain and must be put into perspective. The financial shock is probably behind us. But its negative impact on investment will continue this year. Likewise, the acceleration of inflation in 2022 could have diffuse effects on household consumption, even if wages were to catch up.
The drop in gas prices, the decline in headline inflation and the improvement of survey data in December have created a feeling that for the Eurozone 2023 might be better than expected hitherto. The survey data bode well for the growth momentum at the turn of the year, which could create a favourable carry-over effect for GDP this year and some hope that lower inflation will mean fewer ECB rate hikes. However, caution is warranted. Inflation remains far too high and core inflation has moved higher in December. Moreover, survey data provide little or no information on the pace of growth beyond the first quarter of this year.
The latest economic indicators updated on January 9 2023 and the coming calendar
The latest economic indicators updated on January 2 2023 and the coming calendar
During the press conference following the latest governing council meeting, Christine Lagarde insisted repeatedly that moving to a 50 bp rate hike versus 75 bp previously did not represent a pivot, adding that rates still have to rise significantly and at a steady pace. Consequently, the likelihood of a terminal rate higher than 3.00% has increased, which explains the jump in bond yields. The large upward revision of the inflation projections is probably another factor behind the hawkish message. Forecasting inflation several years into the future is a difficult task, even more so in the current environment
In its second estimate, the Spanish statistical institute (INE) raised slightly the harmonised inflation rate (HICP) for November from 6.6% y/y to 6.7% y/y. This is still a significant decline from the 10.7% y/y figure reported in July, as Spain now reports the smallest rate of inflation in the Eurozone.
UK inflation finally fell in November to +10.7% y/y (+0.4% m/m), compared with +11.1% in October (+2% m/m). Other good news is that core inflation is also falling, for the first time since September 2021 (-0.2 points, i.e. 6.3% y/y). In the face of still very high inflation, however, the Bank of England (BoE) Monetary Policy Committee (MPC) decided to raise its key rate further by 50 basis points, thus bringing it to 3.5%. The rise is less significant than in November (+75 bp) as the BoE must also reconcile it with the risk of recession.
From an economic perspective, 2022 will go down in history as the year in which elevated inflation made a surprising comeback forcing major central banks to start an aggressive tightening cycle. It is highly likely that in twelve months’ time we will look back at 2023 as a recession year, a year of disinflation, and a year in which official interest rates reached their terminal rate and stayed there. As usual, the list of ‘known unknowns’ is long. Energy prices might increase again after their recent decline, disinflation might be slower than expected, policy rates might peak at a higher level than currently priced by markets, and the recession might be deeper and longer than anticipated
US growth recovered significantly during Q3, but is expected to slow down during Q4 according to our forecasts. The labour market is still tight, but early signs of a slowdown are emerging. Headline inflation appears to have peaked, but core disinflation remains to be confirmed, which would forced the Federal Reserve (Fed) to continue its monetary policy tightening, even if it means pushing the economy into a recession in 2023. Looking at the budget, compromise will be key when the next deadlines approach, given the divided Congress following the mid-term elections.
It seems highly likely that for the eurozone, 2023 will bring an easing in inflation, a contraction in GDP and a peak in the ECB’s policy rates. The uncertainties lie in the scale of disinflation and of the recession, and in the level and timing of the peak in rates. According to our forecasts, the fall in inflation will be rapid on the surface (with headline inflation dropping from around 10% y/y in Q4 2022 to 3% in Q4 2023), but this will mask a slower fall in core inflation, which we expect to remain above 2% in a year’s time, from 5% at present. In the face of this persistent inflation, we expect the ECB to hike its deposit rate by 100bp, to 3%, by the end of Q1 2023 and then maintain this restrictive level throughout the year, despite the recession
Unexpected to say the least, +0.4% growth in German GDP in the third quarter should not distract from the bigger picture. While the power of the end of catch-up effects surprised the consensus which did not expect such dynamism in activity in the third quarter, there is no doubt that German growth drivers are fading one by one under the weight of an extremely unfavourable economic climate: record inflation, energy crisis, drop in global demand... After a last stand in Q3, it therefore seems unlikely that Germany could continue to post positive growth over the last three months of the year. While Germany’s entry into recession is almost confirmed, the question of how intense it will be is much more up in the air
The figure zero should define French growth in 2023. The carryover should be zero, due to a second half-year 2022 in which the positive performance observed in the third quarter should be cancelled out by negative growth in the fourth quarter (with a key contribution of a further drop in household consumption). The quarterly growth momentum recorded in 2023 is not expected to provide any further support. A further contraction in GDP is expected in the first quarter, mainly due to a further acceleration in inflation and the probability of lower inventories in companies. The upturn expected to occur from the second quarter should be moderate, limited to offsetting the drop in the first quarter
During the summer, the Italian economy continued to show a strong resilience against increasing uncertainty. In Q3 2022, real GDP rose by 0.5% q/q, benefiting from the recovery of services, while both manufacturing and construction suffered. Domestic demand more than offset the negative contribution of net exports. A wind of growth continues to blow on the Italian real estate market. In Q2 2022, residential sales recorded a +8.6% y/y growth, while house prices in the same quarter grew by 5.2% y/y. Although the carry-over for 2022 is 3.9%, the outlook for the Italian economy has become more uncertain. Households suffer from high inflation, with purchasing power declining, while firms have to cope with increasing costs of production.
Spain is now the eurozone country with the lowest inflation rate, standing at 6.7% in November. Government measures to curb the rise in energy prices are paying off, although the underlying CPI is still rising significantly. The slowdown in inflation is expected to continue in 2023, but the government will keep on providing significant support to the economy. The 2023 budget, discussed in parliament, extends most of the support measures until the end of next year. Faced with the rise in mortgage rates, Madrid eased repayment conditions for households via loan restructuring facilities while allowing for a temporary freeze on monthly payments
Belgian GDP avoided a dip in Q3, but our present forecast suggests Q4 could be worse. A short and shallow recession looks likely as record-shattering inflation is expected to gradually abate throughout 2023. Consumer spending and corporate investment remain sluggish, but the negative impact of energy prices on household budgets looks more limited than many had feared. Active government intervention played a big part here, but fiscal consolidation remains necessary.
After dynamic business activity during the first six months of the year, Austrian growth slowed very dramatically during Q3 2022, due to the economic downturn both nationally and internationally. GDP is not expected to rebound over the final months of the year and is even poised to stagnate in 2023. However, the downturn in business activity has not stopped the government from announcing an ambitious reduction in the public deficit, which would fall below 3% from next year. This would result in a sharp decrease in the public-debt-to-GDP ratio. These commitments appear to be credible, as the incumbent Green President, Alexander Van der Bellen, was easily re-elected on 9 October, offering political stability to the country following the debacle of the 2016 election.
