Global growth to slow in 2023 as central banks tighten monetary policy

China’s economic recovery could help to pull the rest of the world out of recession, Emirates NBD says

The US and other countries continued to raise interest rates to tame inflation. Reuters

Global economic growth is forecast to slow next year as central banks continue to tighten monetary policy in response to higher inflation, according to Emirates NBD.

Inflation in a number of countries remains at multiyear highs as a result of supply disruptions caused by the coronavirus pandemic and higher energy prices prompting central banks to raise interest rates.

Central banks including the US Federal Reserve, Bank of England (BoE) and the European Central Bank (ECB), have raised rates this year by a cumulative 4.25 per cent, 3.25 per cent and 2.5 per cent, respectively, Jeanne Claire Walters, senior economist of Emirates NBD, said.

“The impact of large cumulative interest rate rises across much of the world means that global growth will slow into 2023,” the lender said.

“The IMF [International Monetary Fund] now expects global growth to fall to 2.7 per cent in 2023 from 3.2 per cent in 2022 and 6 per cent in 2021. The fund said that while GDP growth is likely to remain positive next year, high inflation and rising interest rates would make 2023 “feel like a recession”.

In October, the IMF cut its global economic growth forecast for next year, amid the Ukraine conflict, broadening inflation pressures and a slowdown in China, the world’s second-largest economy.

The fund maintained its global economic estimate for this year at 3.2 per cent but downgraded next year's forecast to 2.7 per cent — 0.2 percentage points lower than the July forecast. There is a 25 per cent probability that growth could fall below 2 per cent next year, the IMF said in its World Economic Outlook report at the time.

Global economic growth in 2023 is forecast to be as weak as in 2009 during the financial crisis as a result of Ukraine conflict and its impact on the world economy, according to the Institute of International Finance.

The world economy is projected to grow 1.5 per cent next year, compared to 0.6 per cent in 2009, the IIF’s managing director and chief economist, Robin Brooks and economists Jonathan Fortun and Jack Pingle said this month.

“Although tentative signs are beginning to emerge that inflation may have reached its peak in most developed markets, it appears unlikely that central banks will be in any hurry to undo any of the tightening seen thus far,” Emirates NBD said.

“In fact, recent statements from the Fed, BoE and ECB have all emphasised that policymakers are themselves expecting to have to raise rates further than previously anticipated, albeit at a slightly slower pace than seen in 2022.”

Last week, the US Federal Reserve raised its interest rates for the seventh time in 2022 in its continued efforts to fight inflation and indicated more are to come next year.

Fed chairman Jerome Powell said the central bank would continue to increase rates next year and monetary policy will need to be restrictive “for some time”.

The BoE raised UK interest rates by 0.5 per cent to 3.5 per cent in its attempts to rein-in inflation.

“While we think the UK and eurozone economies are probably already in recession, there is a growing expectation that the economic contraction may be not as deep than feared. This is on the back of a variety of short-term high-frequency indicators performing better than expected,” Emirates NBD said.

“An outright recession is harder to call for the case of the US economy, although it is undoubtedly flirting with one. At present we expect the US economy to grow by less than half a per cent in 2023,” the lender said.

China will also be an important factor in determining global growth next year.

“As China battles large-scale outbreaks of Covid-19 into 2023, the short-term impact is likely to be dampened domestic demand curtailing global growth and further supply disruptions. As activity normalises, however, China’s economic recovery could help to pull the rest of the world out of recession,” the bank said.

China is easing pandemic-related restrictions, following months of lockdowns, as people protest over the government's strict 'zero Covid' policy.