As 2022 was drawing to a close, there were mounting concerns that the war in Ukraine, energy crisis, soaring inflation and the rising cost of servicing debt could trigger a global recession.
But a variety of factors – a sooner-than-expected reopening of China’s economy, a warmer-than-normal winter in energy-strapped Europe and a sustained fall in US inflation – are combining to dissipate some of the gloom that engulfed financial markets at the end of 2022 and fanning hopes the world can dodge a recession.
Data released on Friday showed the UK economy unexpectedly growing in November, and Germany also avoiding contraction at the end of 2022.
“It is less bad than we feared a couple of months ago,” Kristalina Georgieva, managing director of the International Monetary Fund, said at the final WEF panel discussion on Friday.
She signalled that the IMF may raise its previous forecast of 2.7% global growth for this year at the end of the month, while still cautioning against high expectations.
European Central Bank president Christine Lagarde was similarly upbeat for the eurozone economy, saying the “news has become much more positive in the last few weeks”.
The rhetoric has shifted from talk of a recession in the 20-nation club to “a small contraction”, she said.
Europe’s economy grew in January for the first time since June, a closely watched survey showed yesterday. The S&P Global Flash Eurozone purchasing managers’ index (PMI) rose to 50.2 in January from 49.3 in December.
A figure higher than 50 indicates growth.
German Chancellor Olaf Scholz told Bloomberg that his country, which was heavily reliant on Russian gas before the war, will avoid a recession that had been previously predicted for Europe’s biggest economy.
The world economy may also get another boost from China’s decision to scrap its zero-Covid policy.
Vice Premier Liu He told the WEF that the situation in his country has “comprehensively returned to normal”.
For sure, there are some reasons for the guarded optimism.
Price pressures are easing worldwide, in part because global growth has slowed but also due to an untangling of supply chains that were tied in knots by the pandemic and Russia’s invasion of Ukraine.
US consumer prices rose 6.5% in December from a year earlier, down from a high of 9.1% in June.
The ebbing of inflation will support the purchasing power of consumers who spent much of the last year squeezed by rising prices, especially for such essentials as energy, food and rents.
The world economy, nevertheless, is not out of the woods just yet.
With the Federal Reserve, the ECB and several peers still pushing ahead with higher interest rates, the risk of a slump later in the year can’t be dismissed, especially if inflation proves sticky and doesn’t retreat as much as central banks want.
Despite the budding optimism, the World Bank has slashed its growth forecasts for most countries and regions, and warned new shocks could still lead to a recession.
It would mark “the third weakest pace of growth in nearly three decades, overshadowed only by the global recessions caused by the pandemic and the global financial crisis,” the World Bank said.
While the risk of a near-term global recession has diminished, there’s still a 70% chance of a slump later this year or in 2024, according to JPMorgan Chase & Co chief economist Bruce Kasman.
The bottom line: The world economy has begun the new year on a more optimistic note, though there’s still now no guarantee 2023 will end on a stronger note.
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