One chaotic, disappointing year has ended. Another one is likely in store. In October, the IMF released its annual economic outlook projecting weak growth across the world in 2023. It placed particular emphasis on three issues: high inflation and central bank tightening, Russia’s invasion of Ukraine, and the continued effects of Covid especially in China and expand to other territories as well. What to expect for the economy in 2023, and how things have evolved since October, that is to know how matter now.
Inflation and interest rates: We’ve lived through a seismic change in rates that we’re still digesting. Those belated increases, along with improving supply-chain considerations, have done well in improving the inflation outlook. But the effects of those interest-rate increases are still being felt in terms of consumer behavior, firm investment plans, and asset prices. While the runaway aspects of inflation have ameliorated, we are well below a sustainable rate of inflation. The final push toward sustainable inflation levels will require a longer period of sustained higher rates than people imagine. Inflation will take longer and be more painful, triggering a sustained debate regarding the dual mandate.
Interest rates have risen sharply over the past year as a result of the higher inflation and in response. The inflation of the past few years has been attributable to the pandemic and, to a lesser extent, to the Russian invasion of Ukraine. Sudden changes in businesses’ ability to produce struck with sharp changes in the mix of goods and services that consumers wanted to buy, leading to both gluts and shortages across the economy. The good news is that most of the inflation attributable to these one-off factors seems to be on its way out. Overall inflation probably peaked over the summer.
Labor market look like: The labor market remains remarkably strong at year-end, and it seems inevitable that it will weaken. The only question is the pace and severity of that weakening. It’s conceivable that the weakening will be slow and moderate, but the larger issue is a possible decline of consumption. Consumers are facing higher prices, higher interest rates, declining savings rates, more borrowing, and lower wealth levels. For now, consumer spending has held up. As the economy slows, we could be facing a longer consumer-driven recession rather than just significant declines in investment and associated losses in employment. These declines in labor demand will likely center on white-collar workers. For that reason, it could continue to feature a relatively healthy unemployment rate and still have a struggling economy for a longer period of time.
Covid and the war in Ukraine to 2023’s economic outlook: Unexpected geopolitical events, as always, remain wild cards. Specifically, China’s ability to navigate an exit from “zero-Covid” safely and the European exposure to spiking energy prices remain critical risks. The success of China’s reopening has potentially opposing inflationary effects by lessening supply chain disruptions but also contributing to global demand for commodities and energy. It does not look like Covid shutdowns are going to weigh heavily on economic activity, especially now that China is rolling back its zero-Covid policy. But Covid is still very relevant in the sense that disabilities related to past cases of Covid and ongoing fear of the virus appear to be factors impeding the return of some workers to the labor force.
The war in Ukraine also remains a key storyline for the global economy. The most important channel is that the restricted supply of Russian natural gas has created an energy crisis in Europe. This crisis appears to have tipped some European economies into recession, and that has major implications not only for those economies, but also for their trading partners. Covid is probably not going to be a major factor for the economy in 2023 unless there are new variants that are extremely dangerous even to those with booster shots. China’s Covid lockdowns this year have had surprisingly little economic impact on the rest of the world, except in so far as they have reduced the pressure on commodity prices. China’s reopening could lift commodity prices this year, although much will depend on how they go about it and whether they change their mind.
The economic impact of the war in Ukraine for the rest of the world probably peaked back in the summer, if not earlier. The damage that has been done is mostly baked in for everyone outside of Russia and Ukraine. There is room both for positive surprises, a just peace settlement and negative ones a major escalation of the war.
Shortlist that has not been watched up: The fragility of emerging markets because of rising rates as an underappreciated risk, The possibility that companies seeking external financing (either levered companies or high growth, unprofitable companies) will struggle with financing options and trigger financial distress and bankruptcies at a high rate, The acceleration of protectionist and autarkic tendencies that will immiserate the world. Higher levels of government debt coming out of the pandemic are potentially a big deal. Most countries ran large budget deficits in 2020 and 2021 because of reduced tax revenues and higher levels of government spending. And with interest rates rising globally, many countries particularly lower-income countries are likely to face strains making their debt payments.
A wave of defaults on sovereign debt would not only be tough for the countries defaulting but potentially very disruptive for global financial markets. Some pertinent things have to look- How will business investment respond to recent changes in asset prices and the commitment of monetary policymakers around the world to slower growth, will there actually be a big uptick in global defense spending, and if so, what will that do, What will be the longer-term ramifications of the sanctions imposed on Russia and Chinese semiconductors for global fragmentation.
Optimistic case for the global economy in 2023: Parts of Europe are probably already in recession because of their energy crises, but those recessions are likely to be mild if the war in Ukraine comes to an end relatively quickly. More generally, things will be better if economic policymakers remember that the goal is finding ways for people to produce more, rather than consume less. If Russia withdraws from Ukraine and unblocks the flow of commodities that would also be helpful.
Pessimistic case for the global economy in 2023: Most of the concerns have to do with asset prices and financial markets. Tighter financial conditions have led to big reductions in stock prices, but we don’t know how much further stock prices might fall, particularly if it has to tighten more than currently expected. Home prices soared during the pandemic. We don’t know how much of that increase reflects a fundamental shift in values due to people working from home, as opposed to a bubble, so it’s hard to know how much they will fall as housing credit conditions tightened. And, as I mentioned earlier, there is a real possibility of financial market disruption from sovereign debt defaults. Weaker growth in China is also a source of downside risk. With China such a big part of the global economy, there could be significant spillovers to other countries. The other major downside risk is that the world has to deal with some new unpleasant surprise. The global economy today would look completely different if not for Covid and Russia’s invasion of Ukraine. Who knows what else might happen.
Particular context of Bangladesh Economy: Bangladesh’s economy remains in a good position compared to many other Asian countries – including Indonesia and Singapore. The trade deficit is widening due to the sharp rise in import demand, which should be tackled by discouraging unnecessary imports and increasing domestic agriculture production. Huge import payments have eaten away at the foreign exchange reserve. The pace of reducing the poverty rate, proportion of population under the poverty line, has slowed down. Inflation over 8 percent is pinching people’s pockets, as it creates an imbalance in the earnings and expenditure of marginal people. The Bangladesh economy in the New Year will face both opportunities and challenges, depending mostly on developments in the global economy. Needs to do more on our domestic fronts to reduce this inflation.
Inflation is certainly the biggest problem for middle and low-income people. It should continue to support agriculture, remittances, and export sectors to contribute positively from within towards better gains of our economic growth. The monetary policy should continue to move towards market-determined conditions to help stabilize inflation from the demand side. However, the challenges will remain, but the economy of Bangladesh may stabilize with a robust foundation if the global situation turns favorable and austerity measures remain in place.
