Economic Outlook - December 2023

Executive summary

The global economy has proven more resilient than was expected six months ago, but past monetary tightening is weighing on the outlook. Global growth in 2023 was revised upwards mainly due to strong US consumer spending and the recovery of services after the pandemic. While inflation and monetary policy rates have mostly peaked, the brunt of the impact on consumer and business demand will be felt in 2024. We think that GDP growth will weaken in 2024 as the impact of these factors wanes and monetary tightening weighs in. Mild monetary easing will help support tepid growth in 2025.

• The 2023 GDP forecast is better than was expected six months ago. Global GDP growth is estimated to be 2.6% in 2023, an upward revision of 0.4% compared to the July Economic Outlook. Growth is likely to dip to 2.1% in 2024. The resilience of spending by the US consumer has reached its limits and the post-pandemic recovery of services, especially of tourism and international travel, is almost complete. Moreover, the full impact of monetary policy tightening is yet to be felt. For 2025, we foresee growth to recover to 2.6%, as monetary policy starts to ease and inflation has further declined. Growth, will however, remain weak by historical standards.
• Inflation has clearly moved past its peak, with all major inflation components in decline. The energy component has contributed negatively to headline inflation in the US and eurozone in recent months. Moreover, the other inflation components - food, services and goods – are also clearly losing momentum. But core inflation, which excludes energy and food, is persistent, especially in the US. Still, as monetary tightening weighs on demand, headline and core inflation are expected to come down. With the lower persistence of inflation, the eurozone will be ahead with monetary easing.  
• We forecast global trade growth to slow to 0.8% in 2023, from 3.0% in 2022. Trade growth in 2023 is lower than previously expected as the ending of the zero Covid-19 policy in China did not generate the hoped-for boost to exports, and the manufacturing sector is in recession, especially in Europe. For 2024 we predict a recovery of trade growth to 2.5% as these factors wane. Our forecast is in line with the observation that the relationship between trade growth and GDP growth has settled down to 1:1. Trade growth is constrained by rising protectionism and geopolitical uncertainty.
• We estimate GDP growth across advanced markets to be 1.6% in 2023. The impact of past monetary policy rate hikes is increasingly taking its toll, with consumer and business sentiment low and a slowdown in demand expected. Growth in 2024 is forecast to remain very restrained at 0.9%. For 2025, the growth picture looks slightly better. Falling inflation will improve consumer purchasing power. Mild monetary easing will support growth as well.
• GDP growth in emerging market economies (EMEs) is expected to stay in a lower gear at 4.2% in 2023 and 3.6% in 2024. This is due to weak external demand and tightening global financing conditions. Beneath the headline figures lies substantial heterogeneity. Emerging Asia is set to lead other regions again, with India and China being the growth motors. Latin America, struggling with structural weaknesses and political uncertainty, will lag other regions. The growth outlook for 2025 is only slightly better across EMEs (3.9%).
• In our baseline scenario, inflation is expected to come down as monetary tightening is able to remove the persistence in core inflation and there is no new energy price shock. In our alternative scenario, things turn out worse. Inflation is more persistent than expected, for example because consumers continue spending or there is a new energy price rise. This will trigger further tightening (instead of mild easing) by central banks. That will lead to a fall in demand from firms and households across both advanced markets and EMEs, with significant negative effects on global growth.