Global economy to keep its head above water

14 November 2022

Henk Potts, London UK, Market Strategist EMEA

  • A war in Ukraine, aggressive interest rate hikes and price shocks have all conspired to turn positive growth forecasts at the start of 2022 on their head
  • Sustained high prices are also increasing the risk of inflation expectations de-anchoring, which could then force central bankers to double down on interest rate rises
  • That said, the worst for inflation may well be over – with price pressures expected to subside in 2023
  • The world may be at rising risk of recession, but we could yet see a softer economic landing – Barclays Private Bank forecasts global growth of 1.7% in 2023

Another difficult year looks to be on the cards as the global economy and policymakers try to charter tame multi-decade inflation highs and adjust to a post-pandemic world. Growth may be tepid next year, but any recession should be short and shallow. 

It has been a far bumpier year for the global economy and financial markets than was contemplated twelve months ago. A war in Ukraine, surging price pressures, and a pronounced slowdown in China have created a broad-based, synchronised slowdown. Heightened geopolitical tensions, coupled with the aggressive tightening of financial conditions, have infringed on activity as business and consumer confidence take more of a knock. 

Growth slows

At times of economic stress, monetary policy would normally ride to the rescue. On this occasion, however, it has not been feasible, as central bankers have felt compelled to pivot away from promoting growth in favour of ensuring price stability. 

While fiscal support has cut some of the impact of the cost-of-living squeeze, headroom has been limited following the pandemic. Furthermore, policymakers are wary of not undermining the battle against inflation. 

We forecast that the global economy will grow at just 3.2% in 2022 (see table), a significant downgrade to the 4.4% estimate which we made at the start of the year. The revised growth forecast is also below the 3.3% medium-term trend growth ordinarily expected from the global economy.


Unsurprisingly, inflation gauges have surged as the year has progressed. We now expect global consumer prices to have jumped 7.1% this year, compared to the 3.2% increase registered in 2021. 

Recession risk climbs

The risk of a recession has inevitably increased as we turn to prospects for 2023. There are a range of factors that could cause output to shrink over the coming quarters. One of the primary risks to growth is a further de-anchoring of inflation expectations, which would force policymakers into hiking rates further into restrictive territory. 

Conversely, the potential for policy mistakes from overly vigorous central bankers could also hit growth prospects. Further downside risks could emanate from an intensification of the war in Ukraine, an escalation of energy crises, and a harsher-than-expected slowdown in China. Meanwhile, higher rates and the stronger US dollar have started to create headwinds for emerging market finances. 

Inflation prospects appear better

We were acutely aware that inflationary pressures could materialise, given the scale of the pandemic stimulus packages and the unleashing of pent-up demand as economies reopened. The ramifications of the war in Ukraine on commodity markets and the impact of Chinese COVID-19 restrictions on supply chains have powered these pressures to multi-decade highs.

Nevertheless, there is reason for hope. We expect price pressures to ease over the next 12-18 months. This forecasted moderation should be partly driven by statistical (base effects) and technical (fiscal subsidies) factors. More fundamentally, tighter monetary policy usually moderates demand. 

Additionally, retail inventory levels are stocked high, which should create goods disinflation as shops are forced to aggressively discount prices. One of the key drivers of inflation has been energy; crude prices have shown some signs of stabilising over the past few months, with the price of oil slumping 25% between July and September1

Supply chains have slowly picked up as restrictions were removed and capacity increased. The supply and demand dynamic for semiconductors, for example, is in much better balance today than it was at the start of the year. Meanwhile, shipping costs have plunged, with the Baltic Exchange Dry Index down 64% over the past year.

While we expect inflation to peak in the coming months, we still anticipate global consumer prices (CPI) will remain above the target level in many of the major regions. We forecast that global CPI will average 4.6% in 2023, but with prints becoming more digestible as the year progresses.

Ukrainian war to be a drag on growth prospects

The war in Ukraine has taken a devastating toll on its people, created a European energy crisis, had a profound impact on inflation projections, and, in turn, monetary policy. 

Ukraine’s military resistance and support from the international community have been more resilient than originally feared. Nevertheless, Russia has shown few signs of retreating and in recent weeks has displayed a determination to escalate the conflict, including the decision to call up around 300,000 reservists. 

With hopes of a peace treaty still looking fanciful, we expect geopolitical tensions to continue to weigh on sentiment and activity in 2023. 

Post-pandemic blues

The path of the COVID-19 pandemic could also hinder prospects for the global economy in 2023. At the start of October, the World Health Organisation reported that several European countries had seen more COVID-19 cases, hospitalisations, and deaths, as restrictions were removed and colder weather encouraged people to spend more time inside together. 

The prospect of additional waves of the virus through the winter should have relatively manageable implications for countries. However, the risk to domestic activity and global supply chains remains, not least as China maintains its zero-COVID strategy. 

Reasons for some hope

While the outlook for global growth seems to be worsening, there are many supportive factors which should help to limit the extent of any loss in output. Labour markets remain robust, household and corporate balance sheets look healthy, excess consumer saving is helping to cushion demand, and the service sector still has room to recover. 

If, as expected, price pressures ease, some of the intensity may be taken out of the hiking narrative that has been dominating markets. This should then allow policymakers to pivot to a more balanced approach when assessing inflationary and growth risks, leading to a softer economic landing. 

But, another tricky year ahead

2023 looks set to be another problematic year for the global economy as the rebound from the pandemic fades and the cost-of-living crisis takes its toll on activity. Our forecast is that advanced economies will experience a relatively mild recession, with output contracting by just 0.2%. We forecast that global growth will remain positive in 2023, albeit at a weak 1.7%, as a recovery in China (3.8%) and robust expansion in India (5.1%) offsets weakness in western economies. 

While our growth forecast may appear to be discouraging, we should acknowledge that the majority of factors within our 2022 risk framework have already occurred. Therefore, with much of the bad news already incorporated into our low baseline growth forecast for 2023, the potential for further downside from tail risks has actually reduced.

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