The global economy is in the process of gradual recovery following the impacts of the pandemic and Russia’s incursion into Ukraine. Encouraging signs of progress have emerged in the short term.
The COVID-19 health crisis has officially concluded, and supply-chain disruptions have returned to levels reminiscent of the pre-pandemic era. The first quarter of the year witnessed resilient economic activity despite the challenging backdrop, buoyed by surprisingly robust labor markets. Notably, energy and food prices have considerably receded from their peak levels, alleviating global inflation pressures more rapidly than anticipated. Furthermore, financial instability stemming from the banking turmoil in March has been effectively contained, thanks to prompt actions taken by US and Swiss authorities.
Nevertheless, the horizon remains veiled by numerous challenges, warranting caution before exuberance.
According to our baseline projections, global economic growth is expected to decelerate from the 3.5 percent seen last year to 3 percent this year and the next. This marks a 0.2 percentage point improvement for 2023 compared to our April forecasts. In terms of global inflation, we anticipate a decline from 8.7 percent in the previous year to 6.8 percent this year, signifying a downward revision of 0.2 percentage points. In 2024, we expect global inflation to further decrease to 5.2 percent.
The slowdown is primarily concentrated in advanced economies, where growth is projected to diminish from 2.7 percent in 2022 to 1.5 percent this year, followed by a modest 1.4 percent next year. The euro area, still grappling with the repercussions of soaring gas prices resulting from the war, is poised for a sharp deceleration.
In contrast, emerging markets and developing economies are expected to maintain growth momentum, with year-on-year growth increasing from 3.1 percent in 2022 to 4.1 percent this year and the following year. (As depicted in the chart below, the corresponding annual growth figures are 4 percent for 2022 and 2023 and 4.1 percent for 2024.)
However, this average conceals substantial disparities between nations, with emerging and developing Asian economies exhibiting robust growth at 5.3 percent this year, while many commodity-dependent countries are likely to experience declining export revenues.
Risks
The improved outlook of stronger growth and reduced inflation is undoubtedly positive, suggesting that the global economy is progressing in the right direction. Nonetheless, despite the mitigation of some adverse risks, the overall balance tilts towards potential challenges.
Firstly, there are indications that global economic activity is losing momentum. The worldwide tightening of monetary policy has brought policy rates into contractionary territory, resulting in a dampening effect on economic activity. This has led to a slowdown in credit growth to the non-financial sector, increased interest payments for households and businesses, and added pressure on real estate markets. In the United States, the surplus savings resulting from pandemic-related financial assistance, which aided households in coping with cost-of-living pressures and tighter credit conditions, have been largely exhausted. In China, the economic rebound following the reopening of its economy shows signs of faltering, with ongoing concerns about the property sector, which could impact the global economy.
Secondly, core inflation, which excludes energy and food prices, remains significantly above central banks’ targets and is projected to gradually decrease from 6 percent this year to 4.7 percent in 2024, reflecting a 0.4 percentage point upward revision. Notably, core inflation in advanced economies is expected to remain unchanged at an annual average rate of 5.1 percent this year before declining to 3.1 percent in 2024. Clearly, the battle against inflation is far from over.
The persistence of inflation hinges on labor market dynamics and wage-profit interactions. Labor markets continue to exhibit strength, with unemployment rates below pre-COVID levels and employment levels surpassing those of the pre-pandemic period in many economies. While wage inflation has increased, it lags behind price inflation in most countries. This phenomenon is primarily driven by the fact that prices adjust upwards more rapidly than wages when nominal demand significantly outpaces the economy’s production capacity. Consequently, real wages have declined, by approximately 3.8 percent between the first quarter of 2022 and 2023 in advanced and major emerging market economies.
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