The latest Business Outlook from Deloitte Access Economics forecasts a marked slowdown in global economic growth in 2023 as a result of the mounting global risks seen over the past few months.
Several factors have contributed to the global economic outlook, including persistent price pressures, an aggressive and synchronised tightening of monetary policy, geopolitical flashpoints, volatile financial markets, and weakening consumer confidence. As is always the case, different geographies in the global economy are faced by a varying combination of these broad challenges.
The rapid increase in interest rates in the US alongside slowing growth and greater uncertainty is causing an exodus of financial capital for many poorer countries. However, the slowdown in global growth is expected to be skewed towards advanced economies for now.
Europe and the United Kingdom are likely already in, or are very close to recession, while a recession in the United States now looks increasingly difficult to avoid. With weakening growth in China also a contributing factor, likely recessions in major advanced economies on either side of the Atlantic set an ominous backdrop for the world economy in 2023.
Chart 1: Economic growth, major economies
Source: International Monetary Fund, Deloitte Access Economics
Overall, global economic conditions have deteriorated and 2023 will be challenging. However, Deloitte Access Economics is not forecasting the Australian economy to slip into recession.
Despite a weaker global economy, a downturn in the housing market, and a more cautious consumer will weigh on Australian economic growth in the near term, important positives remain.
A strong labour market, rapidly improving net migration and firming wage growth mean that Australia is in a solid position to weather the storm and avoid recession.
Inflation is expected to peak in the December quarter at 7.3% and, while remaining elevated, will gradually retreat through 2023. Retreating inflation and slowing economic growth will give the Reserve Bank an opportunity to follow a less aggressive tightening cycle than has been seen in other countries.
The reduction in the size of interest rate increases to a more typical 25 basis points in October was a relief and is in line with Deloitte Access Economics’ view that financial market expectations of where interest rates might head were always overdone. A lower peak for interest rates in Australia compared with the US will mean further falls in the Australian dollar. But that’s not a disaster – the US dollar is stronger across the board, and the Australian dollar will hold up much better against a broader basket of currencies, which reduces the risk of importing more inflation.