This year 2022 and next year 2023 are difficult years for the world economy. According to the last “Global Economic Outlook” published by the IMF in October, “the global growth forecast of 3.2% in 2022 and 2.7% in 2023 is far below average: global economic growth averaged 3.6% during 2000-21 (and the same during 1970-2021)”[1].
As can be seen in the Table 1 below, the reason for the slowdown is that the three biggest economies in the world, United States, China, and the Euro area are growing much less than before, and especially the next year 2023 will very challenging as, according to other estimates, that year growth in United States and the Euro area could be very low or near 0%.
In this report, an analysis of the state of the world and the United States economy and measures to deal with the challenges ahead will be given.
- State of the world economy
After beginning to recover from the COVID 19 pandemics in 2021 the world economy posted a robust growth of 6.0% that year. But at the end of that year there were already signs that the year 2022 would not see another year of rapid growth. Some of these reasons were: First, the growing geopolitical tensions in Europe that resulted in the war in Ukraine from February 2022; Second, the increase in the price of food and energy due to the strong recovery the world economy was experiencing was causing inflation; third, the coming increase in the cost of capital due to the increase in interest rates that governments were announcing to fight inflation; and fourth, because of the withdrawal of the fiscal and monetary stimulus that governments implemented in 2020 and even 2021.
Table 1. Overview of the world economy
Source: IMF, Global Economic Outlook, October 2022
In the year 2022 the war in Ukraine brought more increases in prices of energy, petroleum oil and natural gas, and food, to an extent not seen in many years. This pushed inflation rates to levels not seen in the world, especially in Western Europe and United States, in forty, or fifty years, when in the 1970s occurred the two big oil shocks.
To fight inflation, Central Banks all over the world, except for China and Japan, began rising its rates, and United States was the more aggressive in this measure. In Table 2 we can for example see how this happened in countries in Asia and others (data until October 20, 2022). In United States the Federal Reserve have kept increasing its rate, the last one on December 14, 2022, to a range of 4.25-4.50. Se Graph 1.
Table 2. Evolution of interest rates in Asia and other countries
Source: Nikkei Asia https://asia.nikkei.com/Economy/Indonesia-hikes-key-interest-rate-to-4.75-highest-in-over-2-years, October 20, 2022
Graph 1. Increases in Fed rates
Source: https://www.washingtonpost.com/business/2022/12/14/fed-rate-hike-december/ December 14, 2022
The high inflation rates depressed consumption, but also bottlenecks in the world economy contributed to the slow growth. But also, for the year 2023 one estimate projects that the United States and the Euro area could see minimal or no growth at all. See Table 3. One good thing is that inflation rates could sharply come down.
Table 3.
Source: ADB “Asia Development Outlook”, Supplement, December 2022 https://www.adb.org/sites/default/files/publication/844296/ado-supplement-december-2022.pdf
In the other hand, the Zero COVID policy in China led to frequent disruption in its economy, and this weighted down in global production. As China has been the main engine of the world economy from the beginning of this century, a slowdown in its growth affects the whole world. Growth in China could slowdown to 3% this year 2022 according to the Asia Development Bank estimate, much lower than the 5.5% figure that Premier Li Keqiang project in March this year. See Table 4.
Table 4.
Source: ADB “Asia Development Outlook”, Supplement, December 2022 https://www.adb.org/sites/default/files/publication/844296/ado-supplement-december-2022.pdf
But China recently eliminated its zero covid policy and there are expectations that its 2023 annual economic growth rate would be higher than what is estimated.
What must happen to improve the growth prospects of the world economy in 2023 and beyond? First, as inflation recedes, Central Banks could stop increasing its rates and even lower them, so improving the appetite for corporate investment and global consumption; Second, even if peace could not be achieved in 2023 in Ukraine, at least an escalation in the war should be avoided so not to see again increases in prices of petroleum oil and some food like wheat; Third, the trade and economic competition (war) that United States is waging against China should not escalate because this could disrupt global supply chains and curtail production in some goods and sectors.
- State of the United States economy
As said before United States moved aggressively to curtail inflation due to soaring prices of energy and food, but also due to a tightening labour market. Unemployment rate is historically in low levels, at 3.6%, and this was pushing up production costs. The Federal Reserve increased its rates beginning from March 2022 from a level of 0.00-0.25 to 0.25-0.50 and the last hike was on December 15, 2022, to a level of 4.25-4.50, at the fastest pace in the last four decades. See Graph 2 below.
Graph 2. Increases in Fed rates in the last forty years
Source: https://www.statista.com/chart/28437/interest-rate-hikes-in-past-tightening-cycles/ December 14, 2022
The Fed will raise its rate to the range of 5.00-5.25 in 2023 and this rate would be maintained at that range for some time according to one estimate. See Table 5 below. According to this analysis, inflation rate will not come down significatively until 2024, among other things, because the labour market will continue tight. And the economy will avoid recession in 2023 but annual growth rate that year and in the next ones will be below 2%, at least until 2027.
Table 5. Indicators of the United States economy
Source: Deloitte Insights, United States Economic Forecast, December 20, 2022 https://www2.deloitte.com/us/en/insights/economy/us-economic-forecast/united-states-outlook-analysis.html
But for a mature economy like United States, growing at a rate between 1.5% to 2.0% is nothing bad, especially compared with the Euro area and Japan. The United States economy strongest points compared with those economies, and to China, is for example that its working-age population will continue growing (among other things because is able to attract young immigrants) and because it spends the most in research and development.
United States will continue be an innovative economy, especially now that the Biden government is going to spend around 280 billion dollars to promote more investment in R&D and related activities, thanks to The CHIPS and Science Act, which includes fifty-eight billion dollars in subsides to bolster its production of semiconductors[2]. Also, the war in Ukraine will increase its military spending and this could bolster its military-industry complex with the positive spill over effects in the whole economy.
In summary, the world economy faces risks, as the continuation of the war in Ukraine, the slowdown of the United States and Euro area economies, and the intensifying of the economic competition between United States and China. All that bodes not well to developing economies that are dependent in the continuous growth of United States, and especially, of the China economy.
December 29, 2022
[1] See IMF, Global Economic Outlook, October 2022, page 8
[2] McKinsey & Company: The CHIPS and Science Act: Here´s what´s in it, October 4, 2022 https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-chips-and-science-act-heres-whats-in-it
