A better-than-expected resilience in advanced economies and positive growth impulses following China’s reopening in late 2022 have led to an improved outlook for the global economy compared to the previous quarter. Nevertheless, global real GDP growth is expected to slow significantly to 2.5% in 2023, before it picks up to 3.0% in 2024 in Euromonitor International’s Q2 2023 baseline forecast. Persistent inflation and high interest rates continue to take a toll on global economic activity, while a high level of uncertainty and risk means the world economy is seeing a range of plausible alternative scenarios.
Growth in advanced economies more resilient than expected
In Euromonitor International’s Q2 2023 baseline forecast, real GDP growth was revised upwards for most key advanced economies, with the exception of Canada, Japan and South Korea. This is mainly due to better-than-expected growth results in many advanced economies in Q1 2023, as pandemic-era excess savings and historically low levels of labour supply have largely maintained spending and employment levels, thereby mitigating the ongoing economic slowdown. However, the combination of persistent inflation and rising cost of capital are expected to increasingly constrain consumers and businesses, ultimately taking a toll on spending, investment and employment to result in low growth over 2023.
The US economy has maintained some growth momentum well into 2023 despite numerous headwinds. With consumer spending as the steady engine of growth, real GDP growth forecast for the US was revised upwards to 0.9% in 2023 (0.5 percentage points higher than Q1 2023’s prediction). However, uncertainties and vulnerabilities remain unusually high, not only because of the growing impact of high interest rates and persistent inflation, but also due to US banking sector turmoil starting in March 2023. As such, the US economy’s subdued growth is forecast to last well into 2024.
The eurozone economy is expected to grow by 0.5% in 2023, an improved outlook compared to the Q1 2023 forecast of 0.2%. This is due to sharply reduced energy prices and considerably higher energy security. Against this backdrop, economic resilience will be supported by strength in the labour market, private consumption and manufacturing. Yet, further increasing inflation, excluding food and energy, and the dampening effect of ongoing monetary policy tightening by the European Central Bank to tame such price pressures, will weigh on growth in the short and medium term.
Growth divergence widens as emerging markets in Asia Pacific outperform
The global economic slowdown in 2023 will come with a widening divergence in growth rates between advanced and emerging markets, led by China’s post-pandemic economic rebound. Pent-up demand is expected to boost consumption in China resulting in substantial regional growth effects, with tourism and commodities benefiting in particular.
Asia Pacific real GDP growth is forecast to reach 4.6% in 2023, the highest across all regions
Source: Euromonitor International
China’s growth will further support momentum in Asia Pacific, a region that includes the fastest growing emerging economies globally in 2023, including India, Indonesia, the Philippines and Vietnam. Although the slowdown in advanced economies will weigh on commodities and manufacturing exporters in the region, these countries are expected to maintain significant growth momentum nonetheless.
Inflation is easing but supply-side pressures remain
Despite moderating, global inflation will remain significantly above the historical trend at 6.9% in 2023 and is not expected to return to pre-pandemic trends before 2025. Declining demand, due to reduced purchasing power and tightening of global financial conditions, will contribute to easing inflation. At the same time, continuous supply-side pressures, particularly regarding agricultural commodities and labour, will keep global inflation elevated for longer.
Alternative scenarios for the global economy: Risks still tilted to the downside
With uncertainty becoming the new normal, the global economy is facing various plausible scenarios. On the upside, it could see a rebound in 2023-2024 if fiscal stimulus in advanced economies increases, economic recovery in China is stronger than expected, and commodity prices decline on the back of a de-escalation of the war in Ukraine. Economic activity in the US, eurozone and China would pick up significantly in the short term under this Global Bounce Back scenario, leading to positive spillover effects and driving global growth (3.6% in 2023, 1.1 percentage points higher relative to the baseline).
However, the multiple risks that the global economy is facing will keep the likelihood of a downside scenario high. Global stagflation continues to be the key downside risk, as global prices could resurge due to further disruption to energy and food supply, while the largest economies may face a hard landing amid prolonged restrictive monetary policies and increasing financial instability. Under this Global Stagflation scenario, global real GDP growth would slow to merely 0.4% in 2023 (2.1 percentage points lower than the baseline) and remain stagnant in 2024, while global inflation could rise further to 7.7% in 2023 and 6.1% in 2024.
The global economy also faces the risk of permanently higher commodity prices, resulting primarily from geopolitical tensions that could lead to further supply disruptions and lower production or export of commodities due to conflict or decisions from key suppliers, such as the Organisation of Petroleum Exporting Countries (OPEC). Under this Commodity Price Hike Scenario, high commodity prices will lead to higher inflation and hit demand, and the global economy would see slower growth in both 2023 and 2024, at 2.2% and 2.4% in real terms, respectively.
High commodity prices will lead to higher inflation and hit demand
Other global downside scenarios include a worsening of the US-China trade war and a hard landing of the Chinese economy given lingering geopolitical tension and problems with the latter.
Economies, businesses and consumers are facing a new economic reality as the world is entering a period of slowing growth, high inflation, higher interest rates, and with uncertainties around commodities and labour supply, as well as shifts in the nature of globalisation. While the global outlook remains uncertain, understanding key economic issues that are likely to decide business outcomes become more important than ever for global companies.