Economic Outlook: Inflation continues to bite

Global GDP growth is slowing year-on-year, but the forecast is not as bad as we had feared

Six months ago, low GDP and high price growth thrust large parts of the global economy towards stagflation. Our scenario models increasingly pointed towards a global recession and our December Economic Outlook painted a gloomy picture.

Now, six months on, we can conclude that our prediction of ‘stagflation light' is not as bad as we feared, although there is a high degree of uncertainty concerning the global economy. This can be destabilising for businesses.

Several factors have steered the global economy away from a recession. First, there is the re-opening of China which will boost consumption and production in China and the rest of the world. Second, economic activity in Europe weathered the energy price shock and sanctions on trade related to the war in Ukraine relatively well, helped by higher than expected energy savings. Third, monetary tightening did not bite as hard as initially envisaged as accumulated savings and high employment has kept the US consumer spending.

However, inflation proves more persistent than envisaged as well, with central banks throughout the world continuing implementing monetary tightening in a bid to address the rates of inflation not seen in decades. The resulting increases in interest rates have impacted the cost of borrowing and will weigh on the economy in the rest of 2023 and 2024.

Indeed, we are not out of the woods yet. More persistent inflation than we currently foresee still has the potential to squash GDP growth enough to trigger a recession and so remains an outlook risk. But certainly, our predictions are more positive than they were at the beginning of the year.

What can we expect of the global economy in 2024?

For 2024 we predict a slight recovery of trade growth to 2.5%, up from the 1.9% we are currently seeing in 2023. GDP growth is likely to struggle however, largely down to the pressures that high interest rates put on consumer spending. We project GDP growth to reach 1.0% in 2023 and is unlikely to get above 0.9% in 2024.

Global growth will be driven by the emerging economies, led in particular by Asia, with Latin America lagging a little behind. However, even this will be modest with GDP growth of 3.9% this year and 3.8% in 2024 for emerging economies.

The supply chain issues caused by the pandemic lockdowns and bottle necks have now abated and we do not anticipate a return, also because China has reopened. We believe inflation will come down, largely because the determination of central banks and that we don’t foresee any new energy shocks, although this will vary across different economies.

Are central banks and governments aligned on tackling inflation?

We consider a deepening of persistent inflation to be the main risk to our outlook. As noted above central banks are working aggressively to tackle inflation by introducing increasingly high interest rates. However, we wanted to look more closely at how governments are working alongside central banks in their bid to reverse inflationary trends. In our full report, Atradius Economic Outlook: It’s still about inflation, we look at government support for central bankers.

During the pandemic, many governments introduced demand stimulus support packages to keep their economies going. But these actions brought a side effect: inflation. These packages have now largely been withdrawn, but will this likewise remove the side effect? So far, not much, but this is largely due to other inflationary pressures such as the war in Ukraine.

Many governments, particularly in advanced economies, have enacted fiscal tightening measures in order to reduce structural deficits. These are ultimately unsustainable. In spite of that, the overall picture remains that governments continue to provide stimulus to the economy. In that sense, we can say that there is some government support for central bankers to reduce inflation.

For now, our forecast estimates that inflation will come down to levels mandated by central banks for most economies at some point during 2024. If this doesn’t happen and banks are forced to continue to increase interest rates to tackle inflation, the outcome is likely to be a severely weakened global economy with an impact felt acutely by advanced economies in particular.

In our report: Atradius Economic Outlook: It’s still about inflation, we explore the developments and trends evident in the major markets. It is an interesting time for the global economy, which has already shown greater resilience than anticipated. Whether this can continue and translate into robust growth remains to be seen. We are wary, as there are still many destabilising factors, including persistent inflation, that could capsize a growth journey.

Download the Atradius Economic Outlook report here