The global economy expanded slightly stronger in the third quarter of 2023, at 0.9%, compared to the second quarter. Notable were the significant differences between the various economic regions. The societal and economic burdens of recent years, especially the pandemic and the energy price crisis, have led to different economic consequences and policy responses in each economic area. The United States saw a robust expansion of 1.3% in its Gross Domestic Product (GDP). Consumers there surprisingly increased their consumption, possibly due to gradually decreasing inflation. In contrast, European countries experienced only minor growth rates in the third quarter, and in some cases, even a decline in economic performance. For instance, in the Eurozone, the economic performance decreased minimally by 0.1%, and the United Kingdom’s GDP stagnated. The energy price crisis continues to have a stronger impact on the economy than in the United States. In Japan, GDP shrank significantly by 0.5%, after the economy had grown strongly in the first half of the year thanks to a significant increase in exports. The inflation in Japan is high by Japanese standards and dampens domestic demand. In China, GDP grew by 1.3%, slightly stronger than in the second quarter. However, the economy continues to be burdened by lingering debt problems, especially in the real estate sector. The GDP in other emerging countries, particularly India and Mexico, likely grew robustly in the third quarter. In Brazil, however, a temporary cooling of the economy is indicated, after growth in the first half of the year was driven by strong harvests and exports, such as soybeans.
In the current fourth quarter, the global economy is likely to expand even more weakly. Especially in the United States and China, economic growth will be less dynamic. Restrictive monetary policies, partially strained debt situations of public budgets, and ongoing high geopolitical upheavals are burdening the economy. From advanced economies, only minor growth impulses are expected. In the United States, growth is expected to slow down after a strong third quarter. No upturn is in sight for Europe and Japan. In recent months, industrial production and retail sales in advanced economies have mostly developed only moderately.
In most emerging countries, a somewhat stronger expansion is expected. The Indian economy has so far been quite robust against global economic turbulence, and the Mexican economy benefits from efforts by American companies to relocate their production and procurement of inputs away from China. The Chinese economy, on the other hand, shows a hesitant upturn after the end of the pandemic restrictions. However, structurally, high debts, particularly in the real estate sector, the shrinking working-age population, and trade and geopolitical conflicts with Western countries weigh on the Chinese economy. GDP is likely to increase only slightly in the fourth quarter.
During the winter half-year, monetary policy in many advanced economies – with the exception of Japan – will remain restrictive. However, inflation rates are gradually decreasing. Central banks will likely lower interest rates only when they see price stability assured on a sustainable basis. On average for the year 2023, inflation in most advanced economies will still be significantly above the target values of the respective central banks. In 2024, inflation will approach the target rates more closely. Against this background, the interest rate hike cycles of central banks are now likely to have reached their end. However, interest rates will remain at a high level during the winter months. From spring 2024, initial rate cuts are expected in the USA and the Eurozone.
In many emerging countries, monetary policy is also restrictive. However, interest rates have probably reached their peak in these countries as well. In Brazil, interest rates have been cut three times since early August due to a weakening economy there. In China, on the other hand, there is no price pressure. The weak economic recovery after the pandemic, the debt problems, particularly in the real estate sector, dampen people’s willingness to spend, and thus inflation.
There are hardly any new impulses from fiscal policy during the forecast period. Public debt is high in many places. Given the higher interest rates, many governments will be cautious with additional spending. In advanced economies, stimulating effects on the economy come from medium-term oriented investment packages that are supposed to promote ecological transformation and semiconductor production. In most emerging countries, no extensive new fiscal packages are expected against the backdrop of high interest rates. An exception might be China, where targeted fiscal packages are intended to stabilize the economy. However, the scope of these measures is significantly smaller than, for example, after the financial crisis of 2008/2009.
Given restrictive monetary policy and limited fiscal policy impulses, the global economy will only slowly pick up pace again next year. The gradually decreasing consumer price inflation and generally low unemployment, even if the labor market situation is somewhat clouding in many places, have a stabilizing effect. In the course of the coming year, economic development in advanced economies is expected to gain somewhat more momentum; however, a strong upswing is not in sight. After the gradual subsiding of inflation, the purchasing power of households will be strengthened, supporting the moderate upswing. Investments will initially be stimulated mainly by fiscal policy measures, such as medium-term oriented investment packages. Slowly decreasing interest rates will additionally promote housing construction and corporate investments during the year 2024. In 2025, most economies are expected to gain somewhat more momentum, given normalized inflation rates and further declining interest rates. In emerging countries, the prospects are generally more favorable than in developed economies. Domestic demand there is somewhat more dynamic, and again decreasing interest rates will also promote investment activity. In China, however, prospects remain subdued; the trend growth has significantly reduced compared to the past decades, in light of demographic development and high debts.
Overall, a growth rate of around three percent is expected for the global economy in 2023 by international institutions such as the International Monetary Fund or the Organization for Economic Cooperation and Development. In 2024 and 2025, the global economy is expected to grow by slightly below three percent. only 2.8% and 2.9%, respectively. The world’s largest economies – the United States, China, and the Eurozone – will all grow only moderately, dampening global economic growth.
There are several uncertainty factors that mostly represent downward risks for the global economy. Geopolitical risks are significantly increased. The Hamas terrorist attack and Israel’s military response could lead to widespread conflict. The relevant countries and actors in the Middle East have indicated that they do not seek escalation. However, unforeseen events could still lead to a larger conflict in this tense situation, which could result in price increases for oil and natural gas.
An additional geopolitical risk factor continues to be the war in Ukraine. An end to this war is not in sight, representing another uncertainty factor for the global economy, especially for economic development in Europe. There are also smoldering geopolitical conflicts in Asia, such as around the Korean Peninsula or Taiwan.
Another risk is that a real estate crisis openly breaks out in China and plunges the economy into a recession that would also have negative effects on the global economy.
There is also a risk that inflation rates will decrease more slowly than assumed. For example, inflation rates for services may remain at a higher level than assumed in this forecast, or the aforementioned geopolitical conflicts may reignite energy prices. Central banks would then have to maintain their restrictive monetary policy for longer. This could ultimately also endanger the sustainability of the debts of private and public households and lead to disruptions in the financial markets.
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