Surveys of economists at the end of 2022 in the US, eurozone and the UK have been unremittingly bleak, stuffed with predictions of recession, higher unemployment and continued inflationary problems. The head of the IMF, Kristalina Georgieva, talks of a tougher 12 months ahead and expects a third of the world to experience a recession. It is depressing stuff. Fortunately, these narrative are probably wrong. We should all cheer up a little.
The evidence suggests 2023 economic performance won’t be as bad as most economists are saying. We are likely to end the year richer, more secure and more content than at the start.
There is no doubt the global backdrop for 2023 is difficult. Households and companies have weathered a pandemic, inflation, record energy costs and a food price crisis over the past three years. But their worst effects have already passed.
Part of my greater optimism is therefore based on an important and almost universal miscommunication of economic forecasts. Far too often, past events are presented as still to come.
The IMF’s latest forecasts from October, for example, predicted global growth falling from 3.2 per cent in 2022 to 2.7 per cent in 2023. This underpinned Georgieva’s comment that this year would be “tougher than the year we leave behind”. The problem is the information these annual average growth rates convey does not tally with the reasonable interpretation of most people.
It may surprise you that in the fund’s case, the relatively strong 2022 reading is caused by rapid end-of-lockdown growth in late 2021 and the weakness forecast for 2023 is primarily caused by the energy crisis the previous year.
Translated into economic activity that occurs solely within the year in question — aligning with most people’s expectation of a forecast — the story changes completely. Contrary to a tougher year ahead, the IMF expects the global economy to grow 2.7 per cent during 2023, significantly more than the 1.7 per cent it thinks occurred during 2022.
The IMF is far from alone in presenting headline growth forecasts that its own officials find difficult to articulate. The OECD said in November that growth in advanced economies would decline in 2023, but the quarterly projections from the same publication show it expects advanced economies’ growth to improve in every quarter this year. Most people would see that as an advance not a decline.
These failures in translating numerical forecasts into a compelling, accurate narrative should concern us. They create an unnecessarily gloomy outlook, which has self-fulfilling properties.
Recognising these presentational problems should make us happier about 2023. But few Financial Times readers will fail to have noticed a second problem with these forecasts: they are severely out of date. Any assessment of the year ahead must also take account of two important changes to the assumptions underpinning the global outlook.
The first reflects natural gas prices. The IMF and OECD forecasts were all made in the autumn and based on financial market expectations for future natural gas prices at the time. The OECD, for example, expected European wholesale gas prices to average €150 per megawatt hour across this year and next.
Current market expectations are for prices to be about half that level. The easing of the energy crisis is an unalloyed boost to the European economic outlook. Lower energy prices will improve projections for incomes, growth and public finances while lowering headline inflation. These are of crucial importance for Europe, which is a large energy importer.
The second change in assumptions must take account of China ending its zero-Covid policy. The virus is generating misery for many, but the deregulation is likely to prove positive for both Chinese and global economic prospects later this year.
India’s devastating Delta variant wave in spring 2021 led to a greater than 8 per cent drop in gross domestic product in the second quarter of that year, followed by an equivalent rise in the third quarter and another 5 per cent gain in the fourth quarter. After the current wave of infection, China’s economic bounceback should, if anything, be stronger because ending compulsory lockdowns will ease supply chain pressures. Global trading bottlenecks should improve.
We should, of course, not get carried away on a wave of optimism. Even as inflation falls, fights between workers, companies and taxpayers over the accumulated losses from the economic crises of recent years can linger. As Olivier Blanchard, former IMF chief economist, has warned, these might well keep price rises too high for too long. Equally, such is the huge uncertainty over the severity of these conflicts that central banks might overdo inflation control and undermine economic progress. Macroeconomic policy errors are therefore pretty likely in 2023.
But uncertainties of this nature are an ongoing fact of life. As we start the year we can say the following with some confidence. Nearly all current forecasts suggest growth in the world economy is likely to improve in 2023 and future forecasts will be more optimistic still. Contrary to the dismal commentary from economists and officials, we should be cautiously optimistic about the year ahead.