A turning point in the global outlook?

Global growth slowed towards the end of 2022, and many countries may experience negative growth numbers during the winter. The main reason for the sluggish growth momentum is high inflation, which has resulted in weak household purchasing power and tighter financial conditions. However, there are signs that we could be approaching a turning point, where the global outlook could start to look brighter. In particular, inflationary pressures have started to decline, China’s outlook has improved due to the end of its zero-COVID policy, and the euro area has benefited from a mild winter, which has softened the negative impact of the energy crisis. 

At the same time, the downside risks are also still elevated. Inflation continues to be clearly above central banks’ targets and a considerably tighter monetary policy could finally tip countries into a recession. The worst effect may be felt in the housing sector. 

Lower but still volatile energy prices

2022 was an extreme year for energy markets, especially in Europe where prices of natural gas and electricity reached unprecedented levels during the summer. However, mild weather and several measures taken by governments have shielded households and companies from the worst blow.

Europe’s energy situation will remain uncertain, but we expect overall energy prices to be lower in 2023 than the year before. The mild winter, high gas storage levels at the onset of 2023, improved efficiency in energy consumption, more LNG infrastructure and alternative power sources should mitigate the worst for gas and electricity prices ahead. Yet, China’s reopening complicates matters as it means Europe has to compete with Asia for LNG supplies. However, we believe there is somewhat more upside than downside for oil prices from today’s USD 85/barrel, in particular due to China’s reopening and OPEC’s desire for higher oil prices.

US growth continues to be sluggish

GDP growth slowed in the US last year as the strong post-pandemic rebound in consumption was over and tighter financial conditions sent construction activity into a steep decline. Growth is expected to continue to be slow in the coming quarters but recession fears may not materialise as the labour market continues to be strong, inflation is coming down and consumers are likely to further consume the excess savings that they accumulated during the pandemic. Moreover, companies hold a lot of cash and that together with Biden’s policy packages, the turnaround in globalisation, lack of skilled labour and increasing wages are expected to encourage fixed asset investments despite the tighter financial conditions.  

COVID turnaround improves outlook in China  

China’s economic outlook improved significantly when the country decided to give up its tight zero-COVID policy. We expect economic activity and especially service consumption to pick up significantly in the coming weeks and months. Chinese households have accumulated significant excess savings during the lockdowns and we expect those to be partly consumed. Part of the savings could help to stabilise the downturn in the real estate sector where we expect the worst to be over soon, and another part will be spent outside the country as Chinese tourists resume travel to other countries.

In the longer run, however, political risks still loom over the Chinese business environment. There is a lot of uncertainty concerning China’s decision-making and President Xi’s role at the moment. While the October Party Congress continued to concentrate power in Xi’s hands, the sudden turnaround in the zero-COVID poli-cy illustrates just how quickly decisions can be made – in one direction or another.

Mild weather helping the euro area

One major obstacle for economic growth last year in the euro area was the energy crisis, which also contributed substantially to high inflation. Luckily, the winter has been exceptionally mild in Europe so far. Together with voluntary cuts in energy consumption both among households and corporates, this implies that gas storages are still full, and energy prices have been much lower than feared. As a result, the likelihood of the downside scenarios for the euro area has clearly declined.

In any case, growth momentum is weak at the moment. PMI readings were below 50 in the last quarter of 2022, indicating that many euro area countries are currently experiencing very low or even negative growth. We expect growth to return to positive territory rather quickly due to high wage increases, which together with fiscal stimulus and slower inflation will improve households’ situation. However, the uncertainty of the euro area outlook remains high. The challenges in the energy sector may continue next winter, which coupled with tight financial conditions implies that the investment environment is going to be difficult.

Inflation will continue to be fast

Inflation will slow down in the euro area and in the US in the first half of 2023. The main reason is energy, as the contribution of the oil price to annual inflation numbers is likely to turn negative. Also, broader global price pressures have continued to abate as supply chain problems have eased. In addition, many freight, food and raw material prices have normalised and the post-pandemic price pressures are over in certain sectors.

On the other hand, wage pressures have remained strong in the US and accelerated in the euro area. Those could keep broad inflationary pressures elevated, but it is good to keep in mind that the relationship between wages and inflation is often complex and the strength of demand will also define whether higher costs are passed on to final prices. There is thus a lot of uncertainty around future inflation paths and the magnitude of further monetary policy tightening required in many western economies. In China, price pressures remained weak throughout the pandemic, but we expect slightly more pressure now that the service sector development is anticipated to be strong.