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Global economy cools in 2023 (but not too much)

In 2021, the recovery from COVID and reopening of borders took annual global growth to a strong 6.3%. In 2022, this returned to a more normal 3.5%, with the prospect of a sharper global downturn in train for 2023.

And yet, the global economy has been somewhat resilient through 2023 to date, with fears of a sharper global slowdown cooling. The IMF’s July World Economic Outlook Update has moderately revised up its global growth forecast, with forecast growth for 2023 now at 3.0% compared to 2.8% in its April 2023 update and 2.7% in its October 2022 update.

Chart 1: IMF growth forecasts, April vs July 2023

Source: IMF World Economic Outlook. 

This improved outlook comes as many advanced economies record healthier than expected growth, in large parts thanks to persistent strength in labour markets. The United States is a good example of this – the unemployment rate remains at historic lows in 2023, at only 3.5% in July. Some indications, like falling average weekly hours and employment growth in certain industries like hospitality and professional services, suggest that the US labour market is returning to ‘normal’, but this is still a very strong result in the context of the pressures being faced. The good outcome may get locked in, as US inflation continues to slow too – prices rose only 0.2% in July, taking year-to inflation to 3.2%.

However, it’s not all upward revisions and good news. While China is still expected to lead global growth in 2023 and 2024 as it finally ends all COVID restrictions, its recovery has underperformed some expectations. Economic activity has slowed after an initial burst of pent-up demand, and domestic demand in China has been muted – consumers remain wary of economic conditions despite restrictions lifting and have reigned in spending and saved more as a result.  

This comes as youth unemployment has risen and trouble in the property market persists. Instead of facing high inflation, China continues to grapple with very low inflation – with prices in July 2023 0.3% lower than July 2022. China’s central bank has been easing monetary policy in 2023 and may keep going as demand remains sluggish.

Other global updates include:

  • The Eurozone reported 0.3% real GDP growth in the June quarter, welcome news after entering 2023 in a technical recession. However, this return was not evenly spread: Germany and Portugal had zero growth, while Italy and Austria had negative growth, which was balanced by positive growth in France and Spain. Inflation is moderating across the Eurozone, but like Australia, services inflation is rising – meaning that ongoing inflation risks remain.
  • New Zealand is officially in a recession, after recording contractions in both December 2022 and March 2023 quarters. This came after aggressive tightening from the Reserve Bank of New Zealand, who have now indicated that there will be no further tightening, leaving the official cash rate at 5.5%.
  • The central bank of Japan set markets alight with speculation after a small tweak in late July to its monetary easing position but have since reaffirmed its commitment to ultra-easy monetary policy. Inflation is undoubtedly rising in Japan, but other indicators remain mixed: consumers are cautious about spending, and a weak export outlook could moderate growth and prices in quarters to come.

All in all, the global economy has proved stronger and more resilient than may have been expected in the first half of 2023. Some of that better news may be because it took a little longer for higher interest rates to subdue spending than had been anticipated, which then weakens the starting point for the 2024 global economy.

This blog was co-authored by Michelle Shi, Economist at Deloitte Access Economics.

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