GLB Group 16

World
Economic
Outlook
July and Forward
ECon om ic OU tl oo k
of ju ly r ep or t
The report projects a moderation in global economic growth, with a decline from 3.5% in
2022 to 3.0% in both 2023 and 2024. While this represents a slight improvement from
1
earlier forecasts, it remains subdued compared to historical trends. Notably, advanced
economies are expected to experience a more pronounced slowdown.

On the inflation front, a gradual decline is anticipated, with global headline inflation
dropping from 8.7% in 2022 to 6.8% in 2023 and 5.2% in 2024. However, underlying
inflationary pressures are likely to persist, necessitating continued vigilance from central
banks. Despite the projected moderation in growth and inflation, significant downside risks
remain. These include potential financial sector stresses, geopolitical disruptions, and
further commodity price shocks.

In this environment, policymakers across most economies prioritize achieving sustained

disinflation while safeguarding financial stability. Central banks are expected to remain
steadfast in their commitment to price stability, employing monetary policy tightening and
strengthening financial oversight measures.
FORCES OF SHAPING
2
3
THE OUTLOOK
4
 Inflation
Energy and food prices, initially surging in 2022, have witnessed a significant downtrend due
to factors like European gas stockpile replenishment and subdued Chinese demand. However,
food prices continue to exert upward pressure. Additionally, supply chain normalization has
contributed to a rapid decline in headline inflation in several countries.

Persistence of inflation owes itself to diverse factors in different economies,

including:
Pass-through effect: Initial inflation shocks are gradually filtering into core
inflation.
High corporate profitability: Businesses maintain elevated profit margins,
contributing to upward price pressures.
Tight labor markets: Strong wage growth, coupled with weak productivity,
leads to rising unit labor costs, further fueling inflation.
 Inflation
Although sustained wage-price spirals, characterized by a mutually reinforcing inflation of wages and prices,
are yet to materialize in most advanced economies, longer-term inflation expectations remain a concern.

Major central banks, recognizing the continued prevalence of core inflation, have communicated the need for
further monetary policy tightening. While the Federal Reserve paused rate hikes in June, future increases are
anticipated. Others, like the Reserve Bank of Australia, Bank of Canada, Bank of England, and European Central
Bank, have maintained their upward trajectory.

It is important to note regional discrepancies. East Asian economies, where pandemic restrictions curtailed
service demand for an extended period, exhibit lower core inflation. Interestingly, China, experiencing well-
below-target inflation, recently implemented policy rate cuts. Similarly, the Bank of Japan retains its near-
zero interest rate policy.
INSTABILITY IN
BANKING
The report suggest immediate concerns regarding banking sector
instability subsided after authorities quelled the March 2023
banking scare, credit availability remains a significant issue.
Though global financial conditions have improved since April
2023, indicating reduced market anxieties about systemic risk,
tighter monetary policies continue to exert pressure on
individual banks. This pressure manifests in two ways: increased
funding costs for banks themselves and heightened credit risks
within their loan portfolios. Surveys across the U.S. and Europe
reveal a substantial tightening of credit access in the first
quarter of 2023, with expectations of this trend continuing. This
is reflected in declining corporate and commercial real estate
lending activity.
CHINA POST LOCKDOWN
The relaxation of stringent lockdown policies in China initially triggered an
economic upswing early in 2023. This was characterized by rebounds in both
manufacturing activity and service sector consumption. Additionally, February
and March witnessed robust sequential growth fueled by strong net exports.
Normalized supply chains and swift fulfillment of backlogged orders by firms
were key contributors to this export-driven surge.

Despite the early boost, China's economic recovery faces significant

headwinds. The real estate sector continues to exhibit weakness, exerting a
negative pressure on investment activity. Furthermore, foreign demand
remains subdued, impacting export prospects. Highlighting the severity of
labor market challenges, youth unemployment reached an alarming 20.8% in
May 2023, further exacerbating concerns.

High-frequency economic data collected through June 2023 suggest a clear

deceleration in momentum during the second quarter. This indicates that the
initial post-lockdown recovery is losing steam, raising concerns about the
sustainability of China's economic trajectory.
 01.
Growth to slow from 2.1% in
2022 to 1.8% in 2023, further

Advanced
to 1.0% in 2024.

Economies'
02.
Growth to fall from 3.5% in

Growth
2022 to 0.9% in 2023, rising
to 1.5% in 2024.

Advanced economies projected to

03.
experience a significant growth slowdown Growth decline from 4.1% in
from 2.7% in 2022 to 1.5% in 2023. 2022 to 0.4% in 2023, then
rising to 1.0% in 2024.
Advanced economies projected to
experience a significant growth slowdown
from 2.7% in 2022 to 1.5% in 2023.

04.
Growth to rise from 1.0% in
2022 to 1.4% in 2023, slowing
to 1.0% in 2024.
 01.
Middle East and Central Asia:
Growth decline from 5.4% in

Emerging
2022 to 2.5% in 2023.

Market and 02.

Latin America and
Caribbean: Growth decline
the

Developing
from 3.9% in 2022 to 1.9% in
2023, reaching 2.2% in 2024.

Economies
03.
Emerging and developing
Asia: Growth to rise to 5.3%
Projected to be broadly stable at 4.0% in in 2023, moderate to 5.0% in
2023 and 4.1% in 2024. 2024
Divergences among economies, with about
61% growing faster in 2023.

04.
Divergences among
economies, with about 61%
growing faster in 2023.
Factors Influencing Global Growth
Advanced economies driving growth decline, with weaker
manufacturing and idiosyncratic factors offsetting services activity.
Emerging market and developing economies show broad stability in
growth for 2023-24.

Assumptions and External Factors

Forecasts based on assumptions about fuel and nonfuel commodity
prices, and interest rates.
Oil prices rose by 39% in 2022, projected to fall by about 21% in 2023.
Global interest rates revised upward due to actual and signaled policy
tightening by major central banks.
Risks to the Outlook
Upside Risks:

Core Inflation Decline: There's a potential for a faster-than-expected decline in core inflation driven by
lower energy prices and an improvement in labor markets. This scenario could alleviate the need for
aggressive monetary policy tightening.

Global Demand Sustainment: The world might experience sustained global demand as consumers in
many economies have yet to deplete the excess savings amassed during the pandemic. This could further
bolster consumption, especially if supported by stronger policy measures, particularly in China.

China's Policy Support: If China implements more robust policy support, especially through means-
tested transfers to households, it could contribute significantly to the ongoing global economic recovery,
generating positive spillover effects

Downside Risks:

Persistent Inflation Risks: Tight labor markets and the pass-through effect from past exchange rate
depreciation could lead to persistent inflation, potentially de-anchoring longer-term inflation
expectations in several economies.
Geopolitical Factors: Unforeseen events, such as an escalation of the war in Ukraine or adverse weather
conditions like those associated with El Niño, could lead to more extreme temperature increases,
exacerbating drought conditions and raising commodity prices.

Financial Market Repricing: While financial markets have adjusted their expectations of monetary policy
tightening, a potential mismatch with policymakers' signals raises the risk of sudden market repricing,
leading to increased interest rates and falling asset prices.

China's Economic Underperformance: Recent developments shift the risk distribution towards China's
growth underperformance. Issues such as a deeper-than-expected contraction in the real estate sector
and weaker consumption could have negative implications for trading partners in the region and beyond.

Debt Distress: Despite easing global financial conditions, high borrowing costs for emerging markets
persist, limiting room for essential spending and increasing the risk of debt distress, especially for
economies with sovereign credit spreads above 1,000 basis points.

Geoeconomic Fragmentation: The ongoing geopolitical tensions, especially surrounding the war in
Ukraine, raise the specter of increased geoeconomic fragmentation. This could involve more trade
restrictions, limitations on cross-border movements, and challenges to international cooperation,
potentially contributing to commodity price volatility.
Policy Priorities
Conquer Inflation:

Central banks in economies with high core inflation should maintain a restrictive stance until clear signs
of cooling inflation emerge.

Utilize data-dependent adjustments and avoid premature easing, while considering government
spending cuts or tax increases to support disinflation strategies.

Maintain Financial Stability:

Implement Basel III and remove forbearance measures to strengthen the financial sector.

Use macroprudential measures preemptively to address emerging risks.

Governments must rebuild fiscal space, and countries at risk can leverage the global financial safety net.

Rebuild Fiscal Buffers:

Pursue credible medium-term fiscal consolidation to restore budgetary flexibility.

Adjust fiscal policies based on private demand strength, protecting targeted support for the vulnerable.

Phasing out untargeted fiscal measures, such as energy subsidies, is warranted.

Ease Funding for Developing Countries:

Enhance coordination on debt resolution through initiatives like the G20 Common Framework
and the Global Sovereign Debt Roundtable.

Address short-term external financing challenges to prevent debt crises' spread.

Enhance Supply Side and Climate Resilience:

Implement labor market reforms to encourage participation, reduce frictions, and support
fiscal consolidation.

Pursue carefully designed industrial policies, avoiding trade barriers, to address market failures.

Promote clean energy investments for decarbonization goals, emphasizing multilateral

cooperation to mitigate climate change and regulate emerging technologies.