Surveys of economists in the US, Eurozone and UK at the end of 2022 were unrelentingly bleak, with projections of recession, higher unemployment and continued inflationary problems. IMF Managing Director Kristalina Georgieva says the next 12 months will be more challenging and expects a third of the world to experience a recession. This is a depressing statement. Fortunately, these narratives are probably wrong. We should all cheer up a little.
Evidence suggests that 2023 economic performance will not be as bad as most economists say. We are likely to end the year richer, safer and calmer than the beginning.
There is no doubt that the global backdrop for 2023 is tough. Households and companies have weathered the crisis of the pandemic, inflation, record energy costs and food prices over the past three years. But its worst effects are long past.
So some of my different optimism is based on a major and almost universal miscommunication of economic forecasts. Too often, past events are still presented as the future.
For example, the IMF’s latest estimates in October projected global growth to fall from 3.2 percent in 2022 to 2.7 percent in 2023. This supported Georgieva’s comment that this year will be “more difficult than last year”. The problem is that the information conveyed by these average annual growth rates does not match most people’s reasonable interpretation.
In the fund’s case, it might surprise you that the relatively strong 2022 reading is due to end-lockdown growth in late 2021, and the weakness forecast for 2023 is primarily due to the energy crisis of the previous year.
Only when we turn to the economic activity that took place during the year in question – in line with most people’s expectation of a forecast – the story completely changes. Unlike a more challenging year ahead, the IMF expects the global economy to grow by 2.7 percent in 2023, much higher than the 1.7 percent it thinks occurred in 2022.
The IMF is not alone in presenting headline growth forecasts that its own officials have trouble articulating. The OECD said in November that growth in advanced economies will decline in 2023, but quarterly forecasts from the same publication show that advanced economies expect growth to improve each quarter this year. Most people would see it as a progression, not a decline.
These failures to translate numerical predictions into a convincing, accurate narrative should concern us. They create an unnecessarily gloomy outlook with self-fulfilling features.
Acknowledging these presentation problems should make us happier about 2023. But few Financial Times readers have noticed a second problem with these estimates: they’re seriously out of date. Any assessment of the coming year must also take into account two important changes in the assumptions that underpin the global outlook.
The first is natural gas prices. IMF and OECD forecasts were all made in the fall and were based on financial market expectations for future natural gas prices at the time. For example, the OECD expected European wholesale gas prices to average €150 per megawatt hour this year and over the next year.
Current market expectations are for prices to be about half that level. The easing of the energy crisis is a mere boost to Europe’s economic outlook. Lower energy prices will lower headline inflation and boost forecasts for income, growth and public finances. These are very important for Europe, which is a major energy importer.
The second change in assumptions should account for China ending its zero Covid policy. The virus is creating misery for many, but liberalization is likely to be positive for both Chinese and global economic prospects later this year.
India’s devastating wave of Delta variants in spring 2021 led to a more than 8 percent drop in gross domestic product in the second quarter of that year, followed by an equivalent increase in the third quarter and a 5 percent increase in the fourth quarter. After the current wave of infections, China’s economic return should be stronger, as the end of mandatory lockdowns will ease supply chain pressures. Global trade bottlenecks will improve.
Of course, we should not be carried away by a wave of optimism. Even if inflation falls, fights among workers, companies and taxpayers over the accumulated losses from the economic crises of recent years may continue. As former IMF chief economist Olivier Blanchard warns, these can keep price increases too high for too long. Likewise, great uncertainty about the severity of these conflicts is that central banks may overestimate inflation control and undermine economic progress. Therefore, macroeconomic policy mistakes are highly probable in 2023.
However, uncertainties of this nature are an ongoing fact of life. As we begin the year, we can say with some confidence: Almost all current forecasts indicate that world economic growth is likely to improve in 2023, with future forecasts being more optimistic. Contrary to the dismal comments from economists and officials, we should be cautiously optimistic about the year ahead.