Skirting a global recession

Europe avoided a recession in the winter of 2022/23 – helped by its shift away from Russian oil and gas – and US consumer spending continued in the first half of 2023. China’s economic rebound following the exit from its zero-Covid policy has fizzled out, but growth remains higher than last year. 

Strength in the global economy reflects a good starting point: the savings built up by households during the pandemic and rising corporate profits (aided by high prices) have protected consumption and investment. These factors will limit the weakening in global growth to 2.3% at market exchange rates this year, from 3.1% in 2022—a reasonable outturn given the headwinds.

Unspectacular but stable growth over next 1.5 years

The lagged impact of the rise in interest rates will constrain activity in the remainder of 2023 and into 2024, but there are few indications of systemic strain in debt markets that could pull the global economy into recession. In 2024, EIU forecasts that slowing growth in the US will be offset by stronger momentum in Europe as German industry normalises following energy-related disruption this year. Moderate stimulus in China will inject sufficient momentum to preserve growth. Emerging Markets will benefit from reduced uncertainty that will come with the conclusion of global monetary tightening. EIU forecasts that the global economy will expand by 2.3% in 2024, before returning closer to its long-term trend rate in 2025-27. Disinflation will allow most central banks to stop policy tightening The supply-side shocks that drove price increases in 2021-22 are reversing as supply-chain dislocation eases and with global energy and food market markets having absorbed the disruption caused by Russia’s invasion of Ukraine. This will drive inflation lower in most markets (it is forecast to average 2.2% across OECD economies), if not undo the price gains of recent years. EIU forecasts assume that the Federal Reserve (the US central bank) and the European Central Bank have already concluded their policy rate increases, although demand-side pressures on some prices mean that both institutions are unlikely to begin lowering rates until mid-2024. Some emerging markets will choose to do so earlier to support growth under the assumption that El Niño weather effects will not be significant enough to drive another major spike in food prices.

Emerging markets will lead global growth 

EIU economists foresee that non-OECD economies will contribute about 60% of global GDP growth over the next five years, with a slowdown in China’s economy offset by stronger contributions from South and Southeast Asia, among other regions. Supply-chain restructuring and global investment in resources that are critical to future industries and the green transition will create opportunities for developing economies such as India, Indonesia, Mexico and Poland. The rising economic weight of emerging markets points to a shift in global power, although the US, aided by its network of alliances and the limited appeal of its major geopolitical rivals, will retain its predominant influence. Geopolitics will continue to influence the economic outlook The Russia-Ukraine conflict is expected to remain unresolved throughout at least 2023-24 but become steadily less intense. However, fresh escalation (for example if Ukraine’s counter-offensive leads to scaled-up military clashes, or if domestic political instability pushes Russia towards even more extreme tactics) would once again upset the global outlook. China-US tensions will permeate deeper into different sectors and geographies, even if the worst-case scenario of conflict erupting over Taiwan is unlikely. Yet even absent major escalation, geopolitical risk will encourage firms to revisit approaches to their supply chains and target markets, influenced and increasingly cajoled by government policy. 

Fragmentation, regionalisation will drive policies

The passage of the worst of the cost-of-living crisis will ease some short-term pressures on policymakers, but the austerity measures now required to repair public finances and insulate governments from higher borrowing costs will be unpopular. Political support for moderate, liberal policies will remain weak and economic policymaking will generally push in a more insular direction, to the disadvantage of international co-operation on critical climate and technology issues. The 2024 US presidential election is set to highlight political and cultural division in that country, whereas politics is moving towards the right in Europe in response to economic and migration pressures. Authoritarian regimes will face challenges of their own, and governance in many parts of the world will remain challenged from threats ranging from climate change to terrorism.

Major shifts in portfolio flows unlikely 

Although analysts at EIU expect to see some important changes in direct investment flows in the coming years, those for portfolio investment will be less marked. US markets will continue to absorb the bulk of global inward portfolio flows, reflecting the enduring attractiveness of the assets and yields available. This will help to cement the continued primacy of the US dollar in the global financial system, despite renewed interest among emerging markets (such as within the BRICS grouping) in exploring alternatives to the US currency. Gradual monetary policy normalisation in Japan will draw some Japanese capital back into the domestic market from Europe and the US, but we are not expecting this to be overly disruptive for global markets.