As the sun begins to set on 2022, data reveals that the global economy has been progressively slowing this year, but not as much as economists had predicted. Several survey results released on Wednesday showed output declines in November across the U.S. and certain economies in Europe. However, several parts of the economy showed resilience toward inflationary pressures.
Global Trends are Still Strong in Some Places
This year’s economic fiasco, garnished with a multitude of geopolitical and supply-chain issues along with relentless health emergencies, has broken investor confidence. Moreover, economists are factoring in the worst-case scenarios in their economic outlooks. However, experts might have read too much into the situation.
The strength that various sectors of the economy are displaying has opened up the possibility that 2023 might not be as bad as feared, and even if a recession hits, it may not be as severe as predicted.
In the U.S. in particular, the labor market is remarkably strong in the face of inflation, high-interest rates, and rampant cost-cutting in companies.
U.S. Consumer Spending Still Above Expectations
Most importantly, consumer spending is still higher than expected, which is something that is encouraging the Federal Reserve to stay aggressive in its campaign against inflation. This trend also kept retail sales strong in October, and may single-handedly help the U.S. economy clock yearly growth at the end of the year.
Earlier this year, the Fed began raising interest rates to cool the overheated economy, sparking wild speculation that the economy would come to a halt before the year was out. Nonetheless, a quarter-point, a half-point, and four three-quarter-point hikes later, the economy’s resistance is stunning economists.
Other Major Economies That May Hold Up Well in 2023
Elsewhere in the world, the outlook is still bleak, but there may be a few upsides that can partially offset the headwinds. For instance, in China, the grip of COVID-19 has not loosened despite strict shutdown policies. Now, as Beijing plans to rejig its pandemic policies, economists foresee a rebound in growth next year.
Again, Russia’s energy supply cut to Europe has not affected the continent as much as analysts had predicted. Households have been cutting back on energy consumption (though that will be difficult to do during the winter), and governments have been providing support to residents.
Bottom Line: Recession May Occur, But Not as Severe as Expected
All said, there are still a lot of factors to ponder in order to have more clarity about what awaits the global economy in 2023. A recession could still be around the corner, and while China may see a growth rebound, certain European countries may handle a recession better than they think.
In the U.S., a recession is almost certain, especially because the U.S. Treasury yield curve still stands inverted (a classic indicator of a recession). Besides for that, a few more interest rate hikes still remain to be imposed, and we are yet to see the full effects of the policy. However, if it is of any assurance, market experts do not foresee a Volcker-style economic crash. Under the leadership of Fed Chair Jerome Powell, interest rate hikes are more systematic and, in many views, too gentle to make any material difference.
