What a difference a couple of weeks can make! Early in January, the World Bank published its latest global economic outlook, which is a tale of woe, with global growth expected to amount to 1.7% in 2023, a sharp correction from the rate of 3% that was expected just six months earlier.
Risk perceptions can change quite quickly, however, depending on the speed and effectiveness of a combination of remedial policy interventions, investor and consumer sentiment and changing circumstances in general.
Three weeks after the World Bank report, the International Monetary Fund (IMF) released its first World Economic Outlook for 2023, which was considerably more upbeat than in October 2022. The IMF’s growth forecast for the global economy in 2023 is 2.9% - considerably higher than that of its sister organisation, the World Bank.
In terms of the value of global GDP, the difference between these two forecasts equates to $1.2 trillion – a substantial amount, representing roughly three times South Africa’s GDP in 2022.
The rival forecasts between these two organisations are based on different analytical methodologies, which ultimately result in the World Bank giving less weight to emerging market economies, which the IMF says will account for roughly 50 percent of global growth this year.
According to the IMF, earlier fears of a global recession have all but dissipated, with only one of the top-20 economies of the world (the UK) expected to record negative GDP growth in 2023. These 20 economies represent 80% of global GDP and include two countries that are forecast to grow at more than 5% in 2023 (India at 6.1% and China at 5.2%).
In recent weeks, silver linings have started to appear in an otherwise gloomy outlook for the world economy. The US economy remains resilient and on track to escape a recession, despite the Federal Reserve’s fastest interest rate increases in 40 years, prompted by the surge in global inflation during the first three quarters of 2022. The unemployment rate in the US dropped to 3.5% in December 2022, below market expectations of 3.7% and representing a full recovery from the Covid pandemic. Total payroll employment in the US rose by 4.5 million in 2022, an average monthly gain of 375,000.
Other positive news on global economic prospects include a more benign inflationary environment, with inflation having peaked in most countries, mainly due to the dramatic decline in freight shipping costs.
Fears that energy shortages would curb European factory output have also not materialised. Europe’s ability to cope with the loss of Russian gas is regarded as key to the global economy’s improving fortunes. Thanks to a combination of conservation efforts, larger reliance on renewables and relatively mild winter weather, European gas storage facilities are now nearly 74% full, compared with a five-year average at this time of year of around 55%.
Further good news was China’s lifting of harsh Covid restrictions in December, much earlier than initially anticipated, as well as the remarkable about-turn in China’s attitude towards the West, as stated by a vice premier during an address at the recent World Economic Forum conference in Davos, Switzerland.
Vice-Premier Liu He made it clear that China wanted international investors to play a key role in Beijing's attempts to revive its slowing economy. During his speech, He mentioned "strengthening international cooperation" and "maintaining world peace" eleven times.
Over the past three years, extensive damage was wreaked on the world economy by the Covid pandemic and Russia’s invasion of Ukraine. Advanced and emerging economies alike were weakened as a result, inter alia, of the following:
· Significant disruptions in trade flows and supply chains
· Commodity price shocks and the highest inflation in four decades
· Declines in consumer and business confidence
· A prolonged risk-off sentiment amongst global fund managers
· Equity market weakness, which eroded household wealth/disposable income ratios
Clear signs are now emerging that point to a reversal of this scenario, as alluded to in the latest IMF forecasts. This is good news for commodity exporters like South Africa, as long as government starts addressing the country’s infrastructure deficiencies with urgency and with sufficient private sector involvement.