The global economy is at the crossroads of declining inflation and near-peak labor market tightness. The services sector is starting to show signs of weakness.
HolonIQ's September 2023 Global Economic Outlook outlines our latest expectations for the global economy and more specifically the G20, for our customers at the world's largest and leading governments, institutions, firms and investors. This month we reflect on now eight months of data for 2023 shaping expectations and look over the horizon at the mega trends shaping the bookends of our short term and long term outlook. Request a Demo for more information on how HolonIQ can help power decisions that matter at your organization.
The global economic landscape stands at a critical juncture where inflation is retreating while labor markets approach peak tightness.
This intersection has significant implications for economies - while price pressures are receding, wage pressures are up. Hawks and doves will probably be more evenly matched at central banks as the decision to ease or pause becomes an even more obscure one. But the signs of loosening of labor markets that we are starting to see now in several economies will likely soon materialize and eventually flow through to earnings. We therefore expect wage growth to come off in the upcoming quarters. Meanwhile, global economic growth in the first half of this year has surprised on the upside as some Western economies displayed unexpected resilience, helped by better-than-expected consumer demand conditions. More recently however, the services sector, which in the first half of the year was the driver of growth, as manufacturing languished, has started to exhibit signs of vulnerability across various economies including in Europe. While this might alleviate concerns about surging inflation, it also raises a flag for potential economic headwinds. This means that once again, like in June of this year, markets are expecting to see rates peaking soon. And this time the pause in rate hikes is finally likely to give way to the eventual adoption of accommodative monetary policy stances by central banks, as has already been the case with some Latin American economies.
Markets are waiting for short-term fiscal support in China. But the economy may need deeper reforms that could in turn affect long term growth
China’s current economic challenges extend beyond the immediate post-pandemic dynamics, and have deeper and longstanding roots in its structural imbalances. Remarkably, over 40% of China's economy depends on investments, an unusually high proportion globally, while household consumption’s share of GDP lags that of other countries. This has led to long term domestic demand weakness in the economy, the solution for which will require significant policy and institutional reforms. Despite the government having introduced targeted economic rebalancing plans to shift focus from investments to consumption starting from 2011, the anticipated transformation has lagged expectations. Currently, while short-term fiscal support is sought to address the immediate demand issues, deeper reforms will likely be necessary as well. Consequently, the Chinese economy is likely headed for a period of adjustments with growth slowing further in the coming years, adding to a decade-long trend of declining growth.
What does China's slowdown really mean?
Zooming out, the implications of China's current slowdown has extended beyond its borders and is already impacting other global economies tied to China through trade. However, the longer-term effects of China's slowdown may not be immediately evident. China remains a dominant economic force, set to overtake the US as the largest global economy, even with lower growth projections that could fit the adjustment scenario discussed above. The long-term costs of its structural imbalances instead may be in the form of lower living standards for its populace in the coming years, a slower ascend to the top of the global economic hierarchy and a more rapid subsequent drop from the top ranks. Simultaneously, it bears long term implications for other economies, especially given that China is a major trading partner for many of the advanced economies. This also leads to the question of who the potential contenders for China might be, as an emerging global economic powerhouse. Potential candidates mainly come from Asia and Latin America, and their ascent hinges on the successful implementation of economic reforms and favorable geopolitical conditions.
The Dollar isn't hitting a BRIC wall anytime soon
The announcement of the expansion of the BRICS economic bloc with the inclusion of new member nations has sparked a discussion about de-dollarization, and the Dollar's status in the global economy. While discussions around the decline of the US dollar's global status have gained momentum, it’s crucial to note that the Dollar’s dominance is not likely to be challenged anytime soon. While the dollar's decline may be overstated in current discourse, a more effective discussion might center around evaluating shifts in the global currency landscape in the longer term.
Most advanced economies have proven resilient in the first half of 2023. But the outlook for 2024 appears less optimistic.
The look back at the year so far is a reminder that economics often throws curveballs when least expected. In stark contrast to the multitude of recession forecasts at the onset of 2023, the year thus far has exhibited resilience, with only Germany succumbing to recessionary conditions among the advanced economies in the G20. This hints at the possibility that the impact of the aggressive monetary policy tightening witnessed in 2023 might be less severe than initially feared, in turn making it likely that the impact in 2024 will be worse than expected. Consequently, our outlook for 2023 and 2024 have been revised for several economies including the US. Commodity prices, mirroring economic trends, depict a similar trajectory—optimism in the current year followed by a murkier outlook for 2024. As we look into the unknown terrain of 2024, we must brace ourselves for unexpected twists, as global economic and political dynamics seldom adheres to script.