The global economic outlook took a positive turn in the first half of 2023 as inflationary pressure began to ease, said KPMG recently when unveiling its latest forecast.
However, ongoing geopolitical tensions and domestic challenges in key markets are slowing a return to sustained growth, the firm pointed out.
According to KPMG’s latest Global Economic Outlook report, global energy prices returning to levels last seen prior to the invasion of Ukraine, combined with easing commodity and food prices, have helped put further downward pressure on inflation for the rest of 2023.
Despite the resilience of the labor market and the improving inflation conditions, KPMG expects global economic growth to be relatively modest over the next two years, and to stay below its long-term average, said Yael Selfin, Chief Economist, KPMG in the UK
“Global growth is expected to be driven by the recovery of the Chinese economy and a relatively strong growth in some of the emerging markets, while Eurozone and the US economy are expected to contribute less to global growth over the next two years,” she noted.
Risks to the outlook are broadly skewed to the downside given the volatility in financial markets, she added.
- Despite the positive news, major economies throughout the world – most recently the UK and USA – are facing their own domestic pressures, delaying any hopes of improving market conditions and a drop in inflation.
- The nuanced, complex picture in each country, region and territory is placing unprecedented pressure on central banks, with worries that core inflation could remain sticky and price rises could become entrenched due to the relatively tight economic environment facing a number of territories.
- Growing fears for the wider international banking system could further complicate matters for central banks as they weigh in financial stability risks against a plan to bring inflation back to target.
- GDP might see growth of 2.1% in 2023 and 2.6% in 2024, with inflation forecast at 5.3% in 2023 and 3.2% in 2024, and global unemployment levels of 5.2% in 2023 and 5.4% in 2024.
Positive growth momentum this year
With monetary policy focused on moderating inflation while stabilising financial markets, fiscal policy is left as the potential tool to boost economic growth, KPMG observed.
Unfortunately, the public finances have deteriorated significantly over the past three years, the firm said.
Governments have spent significant amounts on first shielding their economies from Covid-19 and subsequently on protecting households and businesses from higher energy prices, KPMG pointed out.
That left public debt at historically elevated levels, with less room for expansionary fiscal policy, the firm added.
Even in the US, federal spending is expected to slow despite the ramp up in infrastructure spending, although in China fiscal support is to be stepped up following the reopening of the economy, KPMG noted, adding that the rise in interest rates has made these larger debt levels more costly to service, putting further pressure on government finances.
Nevertheless, some positive growth momentum is expected this year from the relatively smooth reopening of the Chinese economy following the lifting of Covid-related restrictions in December last year, KPMG said.
Global supply chain
The pressure on global supply chains has eased significantly in recent months, while shipping costs have dropped too, according to KPMG’s Global Economic Outlook report .
This should help alleviate some inflationary pressures and improve supply capacity, KPMG predicted.
Expected to recover this year as trade flows normalise with the reopening of the Chinese economy and a recovery in global growth, global trade remains relatively weak, the firm estimated.
In addition, geopolitical tensions might continue to exert some pressure on trade flows over the medium term, KPMG said.
Consumer demand is also expected to pick up this year, with excess savings — money saved during the pandemic when spending on certain services was not possible — still relatively high in China and Europe, which could potentially be deployed once confidence returns, the firm forecast.
Indeed, consumer confidence has started to improve in Europe, although it remains at relatively low levels, the firm added.