Where is the global economy heading in 2023? Plus other economics stories you need to read this week

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Ian Shine, Senior Writer, Formative Content

• This weekly round-up brings you the latest stories from the world of economics and finance.
• Top economy stories: Global economy faces bumpy 2023; US and Japan facing debt difficulties; Pakistan on brink of economic crisis and humanitarian disaster.

1. Where is the global economy heading in 2023?

The year ahead looks better than initially feared for the global economy, but remains fraught with risks, including the potential escalation of the war in Ukraine and the emergence of a transatlantic trade war, the final panel at the World Economic Forum’s Annual Meeting in Davos concluded.

International Monetary Fund (IMF) Managing Director Kristalina Georgieva told Davos that what had improved was the potential for China to boost growth, but she warned: “We have to be cautious”. Global growth is still expected to slow to one of its lowest rates in recent decades, senior UN economists say. They expect growth to drop to 1.9% this year from 3% in 2022 because of intersecting crises such the Ukraine war, surging inflation, debt tightening and the climate emergency. The World Bank sees growth sliding to 1.7%.

A global recession is seen as likely by two-thirds of respondents to the World Economic Forum’s Chief Economists Outlook: January 2023, of which 18% consider it extremely likely – more than twice as many as in the previous survey in September 2022. However, the report also points to tentative grounds for optimism, including a possible easing of the cost-of-living and energy crises.

Concerns about trade and the fracturing of globalization were a key theme at Davos. Several speakers said that multilateralism and cooperation remain effective tools for prosperity, and that economic fragmentation and trends such as “friendshoring” – relocating supply chains within a group of countries with shared values – will be expensive because they will lead to inefficiencies and duplication, and therefore to inflation.

Another risk facing the world economy is trade wars over clean energy subsidies. The EU is reviewing its state aid rules to support the green energy industry, in response to the subsidies and tax breaks contained in the US Inflation Reduction Act.

Slowing exports from key Asian economies are also stoking fears of a further slowdown in the global economy. Japan’s export growth slowed sharply in December as China-bound shipments fell for the first time in seven months, with a slump in sales of cars, car parts and chip-making machinery. And South Korea’s economy contracted for the first time in 2.5 years in the fourth quarter of 2022 – its exports of high-tech products have been falling because of the weaker global economy and China’s recent slowdown.

2. US and Japan facing debt difficulties

The world’s biggest and third-biggest economies are both facing up to problems around debt. The US could face a fiscal crisis in the next few months after the government hit its $31.4 trillion debt ceiling. At the same time, the Bank of Japan has downgraded its economic outlook, shortly after Finance Minister Shunichi Suzuki warned that the country’s finances are becoming increasingly precarious.

The US Treasury has begun using “extraordinary measures” on cash management to try and hold off a debt default until 5 June. The country’s debt ceiling is a legal limit on how much the federal government can borrow. It is set by Congress and was extended to its current level in December 2021 following demands from the Democratic Party. That limit has now been hit following a standoff between the Republican-controlled House of Representatives and President Joe Biden’s Democrats on lifting the debt ceiling again.

Most analysts believe a deal will be reached and a default will not happen, Bloomberg reports, pointing out that the debt ceiling has been raised 45 times in the past 40 years. But in the meantime there is likely to be stock market volatility.

If a default does happen, the US’ credit rating would decrease, leading to higher interest rates. That would put strain on households and businesses, as it would translate into higher borrowing costs for cars, homes and all other loans. The repercussions for the economy could lead to companies cutting jobs in huge numbers.

Japan’s government debt will exceed JPY 1,100 trillion ($8.47 trillion) for the first time at the end of the fiscal year that runs to March 2027, a draft estimate seen by Reuters shows, as the country remains heavily dependent on borrowing.

Japan’s inflation rate has recently hit a 41-year-high. This has kept alive expectations that the Bank of Japan could phase out its ultra-low interest rates – it opted to keep rates unchanged on 18 January to enable it to continue servicing its debt repayments – although some analysts do not expect this any time soon, because of uncertainty over whether wages will increase enough to offset rising living costs.

Prime Minister Fumio Kishida says wage hikes will be key to starting a positive cycle of growth. Japan raised its minimum wage by a record rate of 3.3% last year, but it is failing to keep pace with inflation.

News in brief: Stories on the economy from around the world

Pakistan is facing an economic crisis on a similar scale to Sri Lanka, which could trigger a humanitarian disaster. It is seeking US support for a $1.1 billion IMF deal, as it struggles with high debts and the fallout from catastrophic floods last year. The Pakistani rupee fell by 9.6% against the dollar on 26 January – its biggest one-day drop in over two decades.

China has kept benchmark lending rates unchanged for a fifth month, but analysts say future cuts are possible as the central bank has pledged to support the COVID-hit economy. The economy grew by just 3% in 2022, far below the official target, but the government’s abrupt end to its zero-COVID policy has raised hopes of a recovery.

The Bank of Canada is the first major central bank to say it will likely hold off on further interest rate increases in the fight against inflation. “Recent developments have reinforced our confidence that inflation is coming down,” bank Governor Tiff Macklem said after raising rates by 25 basis points to a 15-year-high of 4.5%.

US GDP grew by 2.9% on the year in the fourth quarter – faster than expected but still its slowest pace in 2.5 years. It could be the final quarter of solid GDP growth, as the full effects of the Federal Reserve’s monetary policy tightening feed through. “The US economy isn’t falling off a cliff, but it is losing stamina and risks contracting early this year,” Sal Guatieri, a senior economist at BMO Capital Markets, told Reuters.

The European Central Bank (ECB) President Christine Lagarde told Davos 2023 that inflation “is way too high” and that “our determination at the ECB is to bring it back to 2% in a timely manner”. However, ECB policymakers have laid out diverging views on future rate hikes. Eurozone inflation was 9.2% in December.

The German government has laid out an improved outlook for growth this year. Europe’s largest economy now expects a 0.2% rise in output in 2023 – having forecast a 0.4% contraction back in October – thanks to measures to deal with the energy crisis and strengthening business sentiment. German producer prices rose in December at a slower rate than the previous month as inflation eases in due in part to lower energy prices.

Australian inflation shot to a 33-year high in the fourth quarter of 2022, as the cost of travel and electricity jumped. Annual inflation rose to 7.8%, more than twice the pace of wage growth.

Iran’s currency has hit a record low against the US dollar, as ties between the EU and Tehran deteriorate amid stalling efforts to revive talks on limiting Iran’s nuclear capacity. The rial has lost 29% of its value in around four months. The EU is discussing a fourth round of sanctions against Iran.

Companies in Europe with junk-rated debt – meaning there is a higher risk of payments being missed – have raised $1.4 billion from bond sales in January. It marks a trend of investors returning to riskier debt after rising interest rates and Russia’s war in Ukraine froze markets last year.

S&P Global’s flash Composite Purchasing Managers’ Index (PMI) for the Eurozone climbed to 50.2 this month from 49.3 in December, marking a surprise return to modest growth and suggesting the economic downturn in the bloc may not be as deep as feared. Germany’s PMI rose for a third consecutive month, to 49.7 from 49.0, while France’s PMI slipped to 49.0 from 49.1. Britain’s dropped to 47.8 from 49.0, meaning private-sector economic activity is falling at its fastest rate in two years, suggesting a risk of recession.

S&P Global’s flash PMI for the US has risen to 46.6 this month from a final reading of 45.0 in December. This indicates that the downturn in business activity eased slightly in January – although it still contracted for a seventh straight month.

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