International outlook for 2023.

• Author: Butters, R. Andrew

Introduction

The international outlook for the last two years has been rendered with high degrees of uncertainty. The outlook for 2023 proves to be more of the same--albeit for different reasons.

Over the course of 2022, the COVID-19 pandemic--through the surge in cases associated with the omicron variant--demonstrated once again its potential to wreak havoc on the global economy. The omicron surge that began 2022 was also accompanied with the retirement of many of the expansionary fiscal and monetary policy responses to the pandemic. Consequently, most countries' economies are expected to have experienced slower growth in 2022 relative to 2021.

Brent crude--also referred to as Brent blend--is one of three major oil benchmarks used by those trading oil contracts, futures and derivatives. The other two major benchmarks are West Texas Intermediate (WTI) and Dubai/Oman, though there are many smaller oil varieties traded as well. Source: IG.com To make matters worse, inflationary pressures, which also began for many countries in the middle of 2021, have now become more pervasive and persistent than many initially expected. These inflationary pressures partly reflect the extremely tight labor markets in many countries, and the continued supply-chain pressures that have only been more strained--especially for food and energy--as a consequence of the Russian war in Ukraine (see Figure 1).

In addition to these factors, monetary policy institutions across the world, including the Federal Reserve and European Central Bank, initiated a sequence of interest rate increases that have raised nominal rates to levels not seen since leading into the financial crisis. In an effort to combat the inflationary pressures being experienced globally (see Figure 2), these interest rate increases have begun to have effects in interest rate-sensitive sectors (e.g., housing), but have also had some voice concerns that they will ultimately result in a global recession in the near term.

The IMF expects growth in the global economy to continue into 2023 at a rate of 2.7% coming off projected growth in 2022 of 3.2%. The outlook for growth in 2023 has become more pessimistic over the last two quarters as most signs indicate the efforts to curb inflation could be more aggressive than originally anticipated. The continued increase in interest rates, coupled with geopolitical shocks (e.g., the war in Ukraine) that might unsettle financial and energy markets, presents significant challenges for the global economy going forward.

Figure 2: Global inflation 2021 2022(p) 2023(p) World 4.7 8.8 6.5 Advanced economies 3.1 7.2 4.4 Emerging and 5.9 9.9 8.1 developing economies Note: (p) indicates a projection. Source: International Monetary Fund: World Economic...