We expect recessions are in the cards for important world economies, but see the timing as varying, depending on each economy’s underlying momentum and exposure to global shocks. For example, high natural gas prices and lagging real wages are likely to push the euro area into recession beginning late this year, while the U.S. economy’s greater momentum should keep it out of recession until the second half of 2023.
The Bad News: Inflation Is Driving Rate Hikes
These economies face broadly similar pressures. Global headline inflation is running at its hottest pace in decades, which has prompted central banks to raise rates in the early stages of the most concentrated tightening campaign seen in more than 20 years. And global economic activity remains hampered by both pandemic challenges and stresses from the Russia-Ukraine conflict, with Russian gas supplies to Europe of particular concern.
But our forecasts must incorporate a competing dynamic: China, where Citi recently reiterated expectations for 3.9% growth this year. Economic data show mounting evidence of recovery, and the government is likely to implement stimulus measures. Those measures should drive a second-half rebound that sets the stage for strong growth in 2023, when we also expect China to revisit its zero-COVID policy. Taken together, these factors have prompted us to boost our China growth forecast for 2023 to 6.1%, up from 4.8%.
Pulling together these developments, our current forecast envisions global growth of 2.9% this year and 2.5% next year. These projections have been reduced by 0.1 percentage point in 2022 and 0.3 percentage point in 2023. Excluding the stimulus-related mark-ups in China, the projections for global growth next year are down by 0.6 percentage point, including a sharp 0.8 percentage-point cut for developed-market economies. In sum, since the end of last year, we’ve reduced our 2022 and 2023 global growth forecasts by 1.3 and 0.7 percentage points, respectively. At the same time, we’ve raised our inflation forecasts by 3.6 and 2.3 percentage points, respectively.
Such sizable revisions underscore the devastating supply shocks we’ve seen, and the headwinds—from Omicron to the Ukraine crisis and high commodity prices—that the global economy has faced. By any metric, that global economy is slowing—and its prospects are deteriorating.
The Good News: We Expect Mild Recessions
On a more positive note, generally speaking we expect the recessions to be relatively mild and to occur in sequence rather than all at once. Those factors should allow the overall global economy to avoid a full-blown downturn.
Global recession is, indisputably, a clear and present danger.
However, we note that the risks to this forecast are skewed significantly to the downside. Global recession is, indisputably, a clear and present danger, and projected downturns in a number of major economies underscore the point that these risks have become more concrete over the past month.
The global economic environment is challenging, and risks abound. The downturn could prove more synchronized than we are projecting—for example, if recession in the euro area triggers a loss of confidence and a broader global contraction, or if Russia cuts off gas supplies to Europe. Slower growth could undermine confidence and kick off “stall-speed” dynamics that cause a sharper drop in growth. And we are painfully aware that 2022’s revisions to our forecast have been almost entirely one-sided, with our growth estimates moving steadily lower. We can hardly be confident that our current forecast marks the end of such revisions.
Ease in Supply-Chain Pressures Could Defuse Inflation
In debating the probability of recessions, we must consider an important change in the global economy—the softening in consumer demand for goods.
We see two factors driving this softening. First, during the pandemic consumers opted for goods and not services. Now that people are feeling more comfortable with COVID risks, the balance is tipping back towards services. But at the same time, rising prices are cutting into real incomes—a dynamic that strikes us as more threatening.
With goods demand slowing, global supply-chain pressures have eased: In June, our pressure index showed its first meaningful retreat since January. But this is hardly an “all clear” signal for supply chains. Many risks are still in play, from the possibility of further manufacturing disruptions to the wildcard of the Russia-Ukraine conflict.
And to take a broader perspective, the effect of softer consumer demand on our recession scenarios isn’t clear. Easing supply-chain pressures could help defuse inflation and lessen the pressure on central banks to raise rates. But slower consumer demand for goods could also indicate broader risks to consumer spending, with the chance of a further squeeze in real incomes. Which of these effects will prove dominant? Unfortunately, we don’t know yet.
For more in depth analysis, please see Global Economic Outlook & Strategy – Global Recession—A Clear and Present Danger.