The global economy is slowing down, but looks set to avoid recession

Business surveys released on Wednesday indicated a drop in output in Europe’s major economies in November, confirming expectations that high energy prices could push them into contraction during the last quarter of this year and the first quarter of next.

Some economists think it possible that the US economy will even experience two consecutive quarters of contraction in the first half of next year in response to the Federal Reserve’s rapid tightening of monetary policy, although this is far from certain.

But even with a weak start to 2023 expected in many of the world’s wealthiest countries, economists are wary of forecasting a global recession, which is commonly defined as an annual output growth rate falling below the growth rate of the population, currently around 1%. .

In practical terms, this means that the deterioration in economic conditions that many nations, businesses and consumers around the world have experienced this year is likely to continue next year, with sharp regional variations, but the decline may not be as severe as feared. just a few months ago, and it could bottom out later in the year.

“While we don’t formally forecast a global recession from a narrow technical point of view, it will look like one for much of the global economy,” said Marcelo Carvalho, global head of economics at BNP Paribas.

With China expected to recover from an unusually weak 2022, many forecasters see global output rising by around 2% next year, a steep deceleration from this year and well below its 3.3% average in the decade that preceded the onset of the Covid-19 pandemic, but still produces a small increase in per capita production.

European economies will face stronger headwinds in the coming months, following Moscow’s decision to limit natural gas supplies to undermine Western support for Kiev. Russian natural gas giant Gazprom PJSC on Tuesday threatened to further restrict exports to Europe via Ukraine from next week, calling into question one of the last remaining routes for Russian gas to reach Europe.

The economic cost of rising energy prices was exposed in purchasing managers’ surveys of European businesses, which recorded another month of declining activity in November. S&P Global said its composite output index for the eurozone, which includes services and manufacturing, rose to 47.8 in November from 47.3 in October, staying below the 50 mark that distinguishes a contraction. from an expansion.

“A recession looks likely, although the latest data provides hope that the extent of the recession may not be as severe as previously feared,” said Chris Williamson, chief business economist at S&P Global.

In the near term, it seems likely that Europe will avoid the worst outcomes that policy makers had feared as they braced for a surge in energy demand during the winter months. A mild October and high levels of gas storage make it less likely that European factories will face energy rationing. As a result, Barclays economists expect to avoid their worst-case scenario of a 5% drop in gross domestic product, but still see a 1.3% drop as likely.

European governments acted quickly to provide relief to households and businesses facing higher energy costs, which helped support a modest rebound in consumer confidence from its historic lows in September. And with natural gas prices easing off their August highs, some producers have added back on previously reduced production, including fertilizer maker Yara International ASA.

However, getting through this winter without rationing will not spell the end of Europe’s energy woes. Winter 2023 natural gas reserves will likely need to be rebuilt with even lower supplies from Russia than this year and increased competition for liquefied natural gas from a faster-growing Chinese economy.

Energy prices are also likely to remain high throughout the next year and beyond, making it difficult for some factories to cover their costs. According to a survey of members of the European Industry Roundtable by the Conference Board, also released on Wednesday, 15 percent of the group’s largest producers plan to permanently shut down some production on the continent.

Going into 2023, the outlook for European economies remains pessimistic, even if the worst has not come. This is especially true for Eastern European countries that border or are close to Russia.

“I don’t think we see an improvement,” said Beata Javorcik, chief economist at the European Bank for Reconstruction and Development. “I don’t think we see many green shoots.”

The biggest uncertainty facing the US economy is how far the Fed will have to raise rates to bring down stubbornly high inflation.

The outlook for China’s economy is also very uncertain as the government eases some of the restrictions associated with its zero-Covid policy and weak growth this year. Economists see a gradual easing of lockdowns affecting major industrial centers as the key to an expected rebound in growth next year, but a recent spate of infections has raised questions about how quickly this may proceed.

“This fine-tuning of its Covid-19 policy is now being tested as cases continue to climb, especially in its Guangzhou manufacturing hub,” said Magdalene Teo, head of Asia fixed income research for Julius Baer. “China is realizing that reopening this winter will not be easy.”

As in Europe, economists warn that the economy is more likely to slow more sharply than expected than to expand more strongly, thus bringing the world closer to recession.

“The risks that things could go wrong are increasing from where they have been in recent months,” said Alvaro Pereira, interim chief economist at the Organization for Economic Co-operation and Development.

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