5 Key Factors Influencing the Global Economy According to Munich Re’s 2023 Economic Outlook
While inflation is falling in many industrialized countries, it will remain higher than previous levels, exceeding the inflation targets set by the major central banks until at least 2024.
That’s one of the key takeaways from Munich Re’s Economic Outlook for 2023. Further, government interventions and geopolitical risks will impact the outlook for quite some time.
The outlook identified five key factors influencing the global economy. The critical issues include high inflation, low economic growth, a robust labor market, geopolitical tension and price shocks for energy and commodities.
“On the positive side, we can now say that the forecasts do not look as grim as many had expected half a year ago,” claims Dr. Michael Menhart, Munich Re’s global chief economist.
1) High Inflation and Low Economic Growth
Economic growth in Europe and the U.S. will be weak and likely experience stagflation. With inflation remaining high while the economic growth rate slows, we will see almost zero real economic growth, thereby impeding investment.
However, real growth in the U.S. and the eurozone could rise above 1% in 2024.
The International Monetary Fund supports this claim in its January 2023 World Economic Outlook Update. It envisions that global growth will fall to 2.9% in 2023 but rise to 3.1% in 2024, below the historical average of 3.8%.
Further, the report concluded that emerging markets will dominate global economic growth in 2023. China will resume its role as the engine of global growth. Consequences from the intense COVID-19 wave and housing market problems continue to weaken the country’s economic development. While Chinese economic growth is expected to recover between 4% and 5% in 2023 compared to 3% in 2022, it will remain far from the growth rates seen in the past.
“Inflation remains challenging. While overall inflation numbers are turning downwards, underlying inflation pressures continue to be elevated for most of the advanced economies,” said Menhart.
Moreover, this trend is expected to continue in 2023. This claim is backed by the International Monetary Fund, which anticipates global inflation falling to 6.6% in 2023 and 4.3% in 2024, still above pre-pandemic levels.
Nevertheless, price increases are expected to remain well above targets set by central banks well into 2024.
2) Strong Labor Markets
Relatively robust labor markets, however, should prevent the global economy from slipping into a sharp recession.
The adverse macroeconomic impact of high inflation on households’ real incomes will be mitigated by relatively stable labor markets and solid employment figures.
In industrialized countries, in particular, high inflation and falling real incomes are putting a noticeable strain on the demand for consumer goods. In addition, the strong recovery experienced in consumption following 2020’s COVID-19-induced recession is now slowing to a stop.
As for companies, less favorable financing conditions impede investment, owing to higher interest rates.
3) Geopolitical Tensions
The Russian-Ukraine conflict and increased tensions between the U.S. and China continue to negatively impact the global economy.
Furthermore, Middle East politics pose geopolitical risks that could significantly impact the economic outlook.
“Against this background, global growth will be rather weak in 2023,” Menhart said.
4) High Interest Rates
Persistently high inflation and economic stagnation create a credibility dilemma for central banks.
“Will they be ready for as many rate hikes as necessary, and will they succeed in bringing down inflation without inducing a recession?” Menhart said.
Controlling inflation will prove more challenging for the European Central Bank, which started raising rates later than the U.S. Fed, mainly because the inflation outlook for the eurozone is clouded by more significant uncertainty compared to the U.S.
This outlook is influenced by significant risks, including, in particular, a further escalation of the Russian war against Ukraine with renewed price shocks for energy and commodities.
Furthermore, there is a risk of a potential recession due to central banks raising interest rates too sharply.
5) Price Shocks for Energy and Commodities
Following the Russian invasion of Ukraine in 2022, the energy and commodity markets have become critical macroeconomic drivers. Additionally, commodity markets have become a decisive factor influencing the global economy.
Fears that the supply of natural gas in Europe could be restricted and that a severe recession could be imminent have proved to be unfounded so far.
However, the effects of last year’s record energy prices on inflation will continue to leave their mark on growth in 2023. Moreover, a reliable supply of natural gas for Europe in the winter of 2023/24 is by no means guaranteed as things stand. &