The global economy is approaching a recession as economists polled by Reuters once again cut growth forecasts for key economies while central banks keep raising interest rates to bring down persistently-high inflation.
One bright spot is that most major economies already in a recession or heading into one are starting with relatively low unemployment compared with previous downturns. Indeed the latest poll expects the smallest gap between growth rates and joblessness in at least four decades.
But while that might deaden the intensity of recessions โ most respondents say it will be short and shallow in key economies โ that may also keep inflation elevated for longer than most currently expect.
A majority of the top global central banks are over two-thirds of the way to the expected terminal interest rate, but with inflation still much higher than their mandates, the risk is those rate expectations are too low.
After being late to call the inflation problem, global central banks have spent most of this year frontloading rate hikes to catch up. Most economists and central banks are of the view there will be little work left to do next year.
Michael Every, global strategist at Rabobank, said โrisk of a global recessionโ is what everyoneโs talking about and has become mainstream in forecasts. โI think thatโs pretty much a no-brainer when you look at the trend in all the key economies.โ
Looking at the low jobless rate is problematic, Every said, because it is a lagging indicator and โthe longer it stays stronger the more central banks will feel that they can continue to hike rates.โ
Of the 22 central banks polled this time, only six were expected to hit their inflation targets by the end of next year. That was a downgrade from July surveys, where two-thirds of 18 were expected to hit their respective targets by then.
Analysts at Deutsche Bank wrote: โโฆhistory never repeats exactly, but since inflation forecasting has generally been so poor over the last 18 months, itโs worth us asking what normally happens when inflation breaches these thresholds. The answer is that itโs normally quite sticky.โ
In the meantime, global equity and bond markets are in disarray while the US dollar is at a multi-decade peak in foreign exchange markets based on US rate expectations.
A strong 70 per cent majority of economists, 179 of 257, said chances of a sharp rise in unemployment over the coming year were low to very low, underscoring how widespread the view is among forecasters that it wonโt be a devastating recession.
Global growth is forecast to slow to 2.3 per cent in 2023 from an expected 2.9 per cent this year, followed by a rebound to 3.0 per cent in 2024, according to Reuters polls of economists covering 47 key economies taken Sept. 26-Oct. 25.
Those were all downgrades from polls taken in July.
Over 70 per cent of economists, 173 of 242, said the cost of living crisis in the economies they cover would worsen over the next six months. The remaining 64 expected it to improve.
While the inflation cycle is global in nature, made worse by a sudden surge in energy prices after Russia invaded Ukraine on Feb. 24, much will depend on how far the US Federal Reserve was likely to push rates higher.
The Fed is expected to go for a fourth consecutive 75 basis points interest rate hike on Nov. 2, and economists say it shouldnโt pause until inflation falls to around half its current level.
China, the worldโs second largest economy, was expected to grow 3.2 per cent in 2022, far below the official target of around 5.5 per cent and also well below pre-pandemic growth rates.
Excluding the meagre 2.2 per cent expansion after the initial COVID-19 hit in 2020, that would be the worst performance since 1976.
Indiaโs economy was also forecast to grow well below its potential over the next two years with medians showing 6.9 per cent growth in the 2022-23 fiscal year and 6.1 per cent next year.
The euro zone economy was expected to grow 3.0 per cent this year but flatline in 2023 before expanding 1.5 per cent in 2024.
