After 3% this year, global economic growth to slow to 2.2% in 2023: Morgan Stanley – polymerupdate.com

With the United States Federal Reserve (US Fed) chair Jerome Powell hinting at a dovish stance in the next meeting scheduled this month, Morgan Stanley forecasts global economic growth to moderate in 2023 with cooling down retail inflation and a pause to marginal interest rate hikes. However, the battle to control inflation would continue at least in the initial few months of the next year on account of excessive post-Covid consumer demand, and bloated retail inventories.

The US-based multinational investment banker forecasts the global economy to narrowly defy recession in 2023, but the economic growth projection at 2.2 percent stands lower than the global gross domestic product (GDP) projections made at 3 percent for 2022. Major takeaways from the report include: the US economy will tread water with 0.5 percent growth, economies in Europe and the UK may contract, and emerging market economies should recover modestly.

The good news, according to Morgan Stanley, is that global inflation is set to peak in the October – December 2022 quarter. In fact, slowing demand, price discounts due to elevated inventories, and declining housing prices, among other factors, will help temper inflation, which should in turn prompt major central banks to pause and assess their recent historic string of rate increases.

Source: Morgan Stanley; G10=Belgium, the Netherlands, Canada, Sweden, France, Germany, United Kingdom, Italy, United States, and Japan, (Switzerland joined the group later, but the name retained as G10); e=estimate, f=forecast, and c=conservative estimate

The US Fed undertook several rounds of high-interest rate hikes in 2022. In fact, the US Fed’s action was taken as the highest interest rate increase since 1981. The same trend was followed by other central banks globally including the European Central Bank (ECB) and the Reserve Bank of India (RBI).

“As consumer goods’ supply chains recover and labour markets see less friction, we could see a sharper and broader fall in inflation, which could imply a somewhat easier path for policy and higher growth globally. Certainly, the interplay of inflation and central-bank intervention will ultimately shape the story of economic growth for 2023,” said Seth Carpenter, Morgan Stanley’s Chief Global Economist.

Meanwhile, the story of economic growth will vary by region. While the Western economies could witness headwinds, Asia may bring in some green shoots for growth, particularly in India, and emerging markets economies could further benefit as the Fed finds its peak rate and the dollar eases. On Wednesday, India’s National Statistics Office (NSO) reported a 6.3 percent expansion in the country’s economy for the July-September 2022 quarter.

Tepid recovery in the US
The combination of slowing growth and cooling inflation is likely to prompt the US Fed to curb its rate hiking. The retail inflation in the United States is measured presently at 8.2 percent which the US Fed targets to bring down to 2 percent in a time-bound manner. But the interest rate hikes and other measures invoked by the US Fed lead to retail inflation at 2.4 percent year-on-year (yoy) by the end of 2023.

“We expect the target range to reach a peak of 4.5 percent to 4.75 percent by January 2023, hold at that level through 2023 and then decline steadily throughout 2024. In this scenario, the US economy should experience a soft landing and a tepid rebound versus the current prevailing view of a hard landing and faster recovery,” said Ellen Zentner, Chief US Economist at Morgan Stanley.

In the labour market, companies have slowed hiring with lean payrolls and difficulty in filling skilled positions arguing against widespread layoffs in 2023. Net job gains have slowed markedly over the year and, together with a modest rise in labour force participation, will likely result in a slightly higher unemployment rate of 4.3 percent by the end of 2023.

A tough road ahead for Eurozone and UK
The Eurozone economy is projected to contract by 0.2 percent in 2023 on the back of the ongoing energy crisis and tightening monetary policy. Surged to an unprecedented annual rate of 10.7 percent, the retail inflation is expected to remain well above target until 2023-end.

“The European Central Bank, driven by inflation concerns, will hike rates to 2.5 percent in the first quarter of 2023 before it begins cutting rates in early 2024. We expect the Eurozone economy to post 0.9 percent GDP growth in 2024, compared with the consensus estimate of 1.6 percent,” said Jens Eisenschmidt, Chief Europe Economist, Morgan Stanley, in the report.

The UK economy grew by 7.5 percent in 2021 and is estimated to expand by 4.2 percent in 2022, largely because of double-digit inflation, that’s slated to decline by 1.5 percent in 2023, the greatest economic deceleration of any major economy, other than Russia. Thus, the Bank of England is set to end its rate hikes at 4 percent and follow the Fed in cutting in early 2024.

An optimistic outlook for Asia
Asia’s economic outlook for 2023 is relatively upbeat, with three of the region’s largest economies helping to lead the way. Recovering private consumption in China could lead the economy to a modest recovery next year with a 5 percent growth forecast for 2023. Most of the GDP growth is set to come in the second half of the year when the economy is expected to fully reopen following the repeal of the government’s ‘zero-tolerance policy on Covid’. This represents a significant improvement from the earlier forecast of 3.2 percent for China in 2022, which is a sharp decline from the average growth in the last decade.

In Japan, a well-developed economy and aging population have kept growth relatively tame even in the best global macro environments. To that end, the country’s GDP is forecast to grow 1.2 percent, despite being below consensus. Households have significant excess cash and deposits that should support growth next year.

India could be a real outlier with 6.2 percent growth in the economy in 2023 and 6.4 percent the next year. Three megatrends underpinned by India’s advanced digital infrastructure are putting the country on a path to surpass Japan and Germany and become the world’s third-largest economy by 2027. India has conditions in place for an economic boom, fuelled by offshoring, investments in manufacturing, and energy transition, observes Chief India Economist Upasana Chachra.

DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com

Source: news.google.com