Global Economy Slows, but Seems to Be Faring Better Than Feared

The global economy has continued to deteriorate as we approach 2022, but not as badly as economists had previously feared, increasing the chances that the world will avoid a deep recession next year.

Business surveys released on Wednesday showed output in the largest economies of the US and Europe fell in November. But the numbers and other economic readings showed a mixed outlook, with some parts of both countries’ economies continuing to show resilience despite high inflation and rising interest rates.

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The outlook is highly uncertain in China, the world’s second-largest economy, as the country sees a surge in Covid-19 cases. Economists expect growth to pick up again next year as Beijing tries to ease strict pandemic policies.

A tight U.S. labor market and still-strong household balance sheets are supporting consumer spending, the main engine of the economy. A healthy consumer helped lift retail electricity sales in October and could keep the world’s largest economy growing later this year. The outlook for the U.S. depends in part on how it weathers interest rate hikes by the Federal Reserve, which is aimed at reducing inflation, which has hit a 40-year high.

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Europe is experiencing an economic crisis that experts feared ahead of Russia’s decision to cut energy supplies. Many households and businesses in the region are adapting by cutting energy consumption, for example, said Adam Posen, president of the Peterson Institute for International Economics. European governments also provided more than expected financial support to households to help deal with rising energy and food costs, he added.

Philidelphia asked for help this year. A tight US labor market is helping to support consumer spending.


Photo:

Matt Rourke/Associated Press

“We have over 75% of the world economy doing really well,” Mr Posen said. The U.S. and European Union are “likely to experience a relatively short, mild recession and return to growth in the fourth quarter of 2023.”

However, many developing countries are lagging behind. The head of the World Bank, David Malpass, has previously warned that developing countries face an additional economic risk: the policies of developed countries to combat inflation and economic stagnation may leave insufficient capital for poor countries.

S&P Global said the U.S. aggregate output index, which includes services and manufacturing activity, fell to 46.3 in November from 48.2 a month earlier, among the fastest contractions since 2009. An index below 50 indicates a decline in economic activity, while an index above 50 indicates growth. .

Chris Williamson, chief economist at S&P Global Market Intelligence, said: β€œCompanies are reporting headwinds from rising costs of living, tightening financial conditions, particularly higher borrowing costs, and weaker demand in domestic and export markets.

US businesses reported that inflationary pressures eased in November, but material prices and freight costs cooled.

In 2021, officials thought the high inflation would be temporary. But a year later, it was still near four-decade highs. WSJ’s John Hilsenrath explains three factors that are holding back inflation longer than expected. Photo: Jacob Reynolds

The economic toll of higher energy prices was evident in surveys of purchasing managers at European businesses, which recorded another monthly decline in activity in November. The S&P Global euro zone aggregate manufacturing index rose to 47.8 in November from 47.3 in October, but remained below the 50 mark that separates contraction from expansion.

The global economic outlook remains uncertain. One big question in the US is how quickly inflation will fall. Its pace will help determine how high the Fed will raise interest rates and how long it will keep them there. The central bank has raised rates this year at the fastest pace since the 1980s. Many economists expect higher borrowing costs in the coming months to have a major impact on spending, threatening US growth.

Earlier this month, Fed staff saw a US recession next year as “as likely” as their baseline forecast of weaker growth, according to the minutes of policymakers’ Nov. 1-2 policy meeting released Wednesday. This meant a downgrade in the economic outlook due to the tightening of financial conditions that took place this fall.

Europe’s economy will face the strongest economic crisis in the coming months. Russian natural gas giant Gazprom PJSC on Tuesday threatened to further cut exports to Europe via Ukraine starting next week, casting doubt on one of the last remaining routes for Russian gas to reach Europe.

China’s easing of Covid-19 restrictions is key to an expected rebound in growth next year, but a recent spike in infections has raised questions about how quickly it can proceed.

“The fine-tuning of its Covid-19 policy is now being tested as cases continue to pick up, particularly at its manufacturing hub in Guangzhou,” said Magdalena Teo, head of Asia fixed income research at Julius Baer. “China understands that reopening this winter will not be easy.”

The economic outlook in China is highly uncertain as the country sees an increase in Covid-19 cases.


Photo:

THOMAS PETER/REUTERS

Most forecasters expect global production to increase by around 2% next year. This is a sharp slowdown this year and below the average of 3.3% in the decade before the start of the Covid-19 pandemic, but still leads to a slight increase in output per person.

Although most of the world’s richest countries are expected to get off to a weak start to 2023, economists are wary of predicting a global recession.

“While we are not officially predicting a global recession from a narrow technical perspective, it will be the same for large parts of the global economy,” said Marcelo Carvalho, global head of economics at BNP Paribas..

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In practical terms, this means that the challenges faced by many countries, businesses and consumers around the world this year – strong regional changes – are not over.

The U.S. is expected to see modest gains next year. The Organization for Economic Co-operation and Development projects that US economic output will grow by 0.5% in 2023, falling to 1.8% in 2022. Economists polled by the Wall Street Journal expect US gross domestic product to grow at an annualized rate. 0.4% in 2023, and they see an increased chance of a recession next year.

Europe looks set to avoid the worst outcomes of energy outages. Mild boilers and high gas storage levels make Europe’s plants less likely to experience energy constraints. As a result, Barclays economists expect a 1.3% decline in gross domestic product here, less than their worst-case scenario of a 5% decline.

Although conditions may begin to improve next year, economists have warned that the global economy is still in a precarious position.

Alvaro Pereira, the OECD’s acting chief economist, said: “The risks that things could go wrong are increasing compared to the last few months.”

Write to Paul Hannon at [email protected] and Sarah Chaney Cambon at [email protected]

Corrections and enhancements
A survey of participants in the European Industry Round Table was also published. An earlier version of this article incorrectly identified it as the European Round Table of Industrialists. (amended on November 23)

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