What will the global economy look like in 2023?

Three experts discuss the outlook for the global economy in 2023. While they agree that inflation is likely to ease, there remains a significant risk that it will take a long time for inflation to fall to the central bank’s target level. Other risks lurk, ranging from sovereign debt defaults to geopolitical rifts. A chaotic, disappointing year is drawing to a close. Another one might be in the store. In October, the IMF released its Annual Economic Outlook , predicting weaker global economic growth in 2023. Three issues in particular were highlighted: high inflation and central bank tightening, Russia’s invasion of Ukraine, and the lingering effects of the COVID-19 pandemic — especially in China. Harvard Business Review on economic forecasts for 2023 and since October Three experts were asked about developments since. Mihir Desai is Professor of Finance at Harvard Business School. Karen Dynan is a professor at Harvard University and a senior fellow at the Peterson Institute for International Economics. Matt Klein is an economics reporter and the author of the The Overshoot newsletter. We posed the same question to all three individuals; their responses, edited for length and clarity, are listed below. Let’s start with inflation and interest rates: how the year ends ? Mihir Desai: We have experienced a dramatic change in interest rates that we are still digesting. These belated increases, along with improved supply chain considerations, have done a good job of improving the inflation outlook. But the effects of these rate hikes are still being felt in consumer behaviour, company investment plans and asset prices. While the runaway aspect of inflation has improved, we are still well below sustainable inflation rates. Ultimately moving towards sustainable levels of inflation will require persistently high interest rates for a longer period of time than people think. In other words: 4-5% inflation by May 2023, but getting back to 2%-3% inflation will take more Longer and more painful, sparking an ongoing debate about the Fed’s dual mandate. ) Karen Dynan: Inflation is high no matter how you cut it. I think the underlying trend in the U.S. is around 5%, which is well above the Fed’s target and the highest level in four decades. Interest rates have risen sharply over the past year as inflation rises and the Federal Reserve tightens policy. New mortgage rates have more than doubled compared to a year ago. They hit 7% in October and November, a level we haven’t seen since the early 2000s. horse Ter Klein: Inflation over the past few years can be attributed to the pandemic and To a lesser extent, it was attributed to Russia’s invasion of Ukraine. Sudden changes in the productive capacity of firms collide with sharp changes in the mix of goods and services consumers want to buy, leading to surpluses and shortages throughout the economy. The good news is that most of the inflation caused by these one-time factors Seems to be fading away. Headline inflation is likely to peak in the summer. The bad news is that underlying inflation also appears to have edged up from around 2% p.a. to 4-5% p.a. What will the labor market look like next year? Does the recent wave of layoffs show that a “soft landing” without job losses is out of the question? Mihir Desai: The labor market remains very strong at the end of the year and it seems inevitable will weaken. The only question is the speed and severity of this weakening. It is conceivable that the softening will be slow and mild, but the bigger concern is the likely decline in consumption. Consumers face higher prices, higher interest rates, falling savings rates, more borrowing and lower wealth levels. For now, consumer spending has been holding steady. As the economy slows, we may face a longer consumption-driven recession than just a sharp drop in investment and associated job losses. These declines in labor demand will likely be concentrated among white-collar workers. For this reason, we can continue to have a relatively healthy unemployment rate (4%-5%) and the economy will still struggle for a longer period of time. Karen Dynan: There is a lot of uncertainty about the direction of the US labor market. Overall job growth remained strong despite news of some company layoffs. The labor market remains very tight, with about 1.7 job openings for every unemployed worker. All of this is creating wage pressure which in turn affects prices. The Fed’s hope is that bringing labor demand back in line with labor supply will be enough to bring inflation down to target without mass job losses. But history shows that this is not enough. A more likely scenario is that the unemployment rate will have to rise significantly to reduce wage pressures enough to force excess inflation out of the system. horse Ter Klein: Underlying inflation appears to have accelerated from about 2% per year to 4-5% per year, Because wages are growing several percentage points faster than the long-term growth rate until 2020. There are basically three interpretations:

Wages are growing exceptionally fast because so many people are employed and feel secure about their ability to find new jobs, which means inflation will only go away if many people are unemployed their job.

What is the optimistic scenario for the global economy in 2023? What might happen if we look back a year and find that growth has exceeded expectations? Mihir Desai: The extreme optimistic scenario is that inflation is very fast and we return to 2% inflation early next year, allowing shorter periods of high interest rates and not There will be major unemployment. This seems implausible to me, although the current yield curve could be explained in this way. It’s remarkable how deeply entrenched this view is today. Card Len Dynan: In my view, a soft landing—meaning Keeping inflation under control – would be a very good outcome for the US. If inflation falls back to 3% in 2023 without massive job losses, I think that’s a very good outcome. Parts of Europe may already be in recession due to energy crisis, but if Ukraine With the war ending relatively quickly, these recessions are likely to be mild. horse Ter Klein: The best thing that can happen to global growth is that underlying inflation starts to fade on its own, And policymakers are flexible enough to recognize this and adjust accordingly. More generally, if economic policymakers keep in mind that the goal is to find ways It would be better to get people to produce more, rather than consume less. It would also help if Russia withdrew its troops from Ukraine and unblocked the flow of goods. What is the pessimistic scenario? What downside risks are you concerned about? Mihir Desai: The pessimistic case is that inflation remains above 5% throughout 2023 as wage price spirals mean interest rates have to stay high for longer time. The stock market has been undergoing a valuation reset — and stocks continue to fall amid the pessimism, as the prospect of lower corporate earnings and higher interest rates still isn’t fully priced in. Karen ·Dynan: Most of my concerns are related to asset prices and financial markets. Tighter financial conditions have sent stock prices down sharply, but we don’t know how much more they will fall, especially if the Fed has to tighten policy more than currently expected. Housing prices soared during the epidemic. We don’t know how much of this increase reflects a fundamental shift in values ​​caused by people working from home rather than a bubble, so it’s hard to know how much they will fall as housing credit conditions tighten. And, as I mentioned before, a sovereign debt default is a real possibility disrupt financial markets. Slowing growth in China is also a source of downside risk. The massive Covid shutdown in China may be behind us, but a sharp downturn in the housing market could severely dampen economic activity in 2023. With such a large share of the global economy, China could have major spillover effects on other countries. horse Ter Klein: The rationale for pessimism is that policy makers may be too slow to realize they are making mistakes a mistake. We’re all trying to interpret the same set of numbers, but they’re hard to interpret. A major downside risk is that the Fed realizes that rate hikes are too high too late. Another major downside risk is that the world has to deal with some new unpleasant surprises. The global economy would look very different today without Covid and the Russian invasion of Ukraine. Who knows what else will happen?