Five Global Economic Challenges in 2023

If 2022 was a tough year for the global economy, then 2023 will be even worse with a looming recession. However, the prediction will not all be a disaster.

2022 is expected to be the year when the global economy will recover from the chaos caused by the COVID-19 pandemic. However, Russia’s invasion of Ukraine on February 24th sent the global economy into uncertainty.

The war in Ukraine and Western sanctions against Russia fueled geopolitical tensions, sent energy and food prices soaring beyond unprecedented levels, and disrupted supply chains, making global economic recovery extremely difficult.

As inflation rose to its highest level in years, the central bank was forced to tighten cash flows by raising interest rates in the face of an already slowing economy, further raising prospects for a recession in 2023. However, a recession is only one of the economic pains that await all in 2020. This. Here are some of the biggest challenges the global economy may face:

A global recession is imminent

2023 is forecast to be the third worst year for global economic growth this century, after 2009 when the global financial crisis caused a deep recession, and 2020 when the COVID-19 lockdown brought the global economy to a virtual halt.

Analysts expect major world economies including the United States and Britain, as well as the eurozone, to slide into recession this year as central banks continue to raise interest rates to dampen demand for consumer goods and services in a bid to control inflation.

“The impending severity of global gross domestic product (GDP) depends primarily on the state of war in Ukraine,” analysts from the Institute of International Finance wrote in a research note, adding that the conflict risks becoming a protracted war.

A contraction in developed economies and a stronger US dollar will hurt exports, creating problems for export-oriented Asian economies.

“As inflation now appears to be receding worldwide, central banks should be able to relax the emergency brake quickly, to allow the recovery to begin late next year (2023),” economists at Capital Economics said in December 2022.

“stubborn” inflation

Price increases are likely to moderate in 2023, helped by weaker demand, lower energy prices, reduced supply, and lower shipping costs. However, inflation would remain above the central bank’s target level, prompting further rate hikes which would mean more “pain” for the economy and the risk of exacerbating the global debt crisis.

“The resilience of the (euro zone) economy, and particularly the labor market, suggests that inflation could be higher and last longer than we anticipated,” said Andrew Kenningham, Chief European Economist at Capital Economics. He added that the core inflation rate will fall more slowly because wage increases are strong enough to keep inflation in the service sector high.

China’s COVID-19 pandemic chaos

Just weeks into the start of 2023, China is dropping its controversial zero-COVID policy. However, the decision left the country’s healthcare system overwhelmed amid an alarming rise in COVID-19 cases.

Following the experience of other countries, surging infections are expected to cause short-term disruptions to the world’s second-largest economy.

While the near-term outlook looks bleak, analysts expect China’s economy to end 2023 on a brighter note with a major boost resulting from Beijing’s elimination of COVID zero and its support for the country’s near-collapsed property sector.

“China’s recovery, combined with the regional reopening, means Asia can have a good 2023,” Christian Nolting, Head of Investments at Deutsche Bank, said in a note to clients. This recovery is believed to be able to “stabilize the economies of neighboring countries and many commodity-exporting countries (such as in Latin America), given that China is the dominant consumer of commodities.”

Energy crisis
The precarious energy situation, especially in Europe, will continue to cast a shadow over governments in 2023. Europe may well escape a total energy crisis this winter, thanks to warmer-than-usual weather and consumers reducing their energy use.

Lower demand for heat means the region’s storage facilities, which were fully stocked last year, may still be heavily stocked later this winter. The situation could still be challenging ahead of next winter. After spending hundreds of billions of euros in the last year looking for alternatives to Russia’s energy and securing consumer needs, Europe may struggle to once again fill its storage facilities.

Nolting said energy remains the main risk factor in the region, “add to the possibility of gas shortages in the winter of 2023/2024.”

Geopolitical tensions and technological wars

Military and political tensions will continue to be one of the biggest risks to the economy, just as the year has just gone. While Russia’s war in Ukraine shows no sign of ending, US and Chinese friction over Taiwan, and escalating tensions on the Korean peninsula, are likely to keep investors on guard this year.

“Solutions to ending Russia’s invasion of Ukraine remain elusive. This in turn means no solutions to the after-effects of this conflict in areas such as migration movements, global supplies of fossil energy commodities and food ingredients, and the potential for geopolitical shifts that extend far beyond territory,” Nolting said.

The battle for technological supremacy between the US and China may intensify in 2023.

“The trade conflict has now turned into an attempt to set long-term standards that apply in very important areas such as 5G, artificial intelligence, and microchips,” said Nolting.

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