Strong labour markets and a resilient services sector drove gradual improvements to global economic projections for the year. However, a sharp slowdown persists due to high inflation, rising interest rates and unstable financial conditions.
Global real GDP is expected to grow 2.6% in 2023—an increase from the 2.5% forecast in Q2 and the 2.3% forecast in Q1. Inflation continues to decelerate from 2022 but remains elevated. The latest data puts inflation at 7.0% this year—up slightly from the 6.9% projected last quarter.
Gradual improvements but fragile outlook
The global economic outlook slightly improved based on Q3 forecasts but sits far behind long-term growth trends. Labour markets and the services sector prove resilient, showing optimistic signs ahead.
But lingering inflation and the lagged effect of high borrowing costs will dampen economic prospects in 2024.
Weak growth expected in the US and Eurozone
The US and Eurozone will record weak growth in 2023. Despite headwinds, real GDP is expected to remain slow at 1.2% in the US and 0.6% in the Eurozone; though, subtly increasing from Q2 estimations of 0.9% and 0.5%, respectively. But these projections are behind historical economic performance for each region.
The US has repeatedly surprised to the upside and pulled ahead of the Eurozone after both economies saw a 0.2% growth forecast in Q1.
Emerging markets outperform advanced economies
Emerging markets remain the growth engine of the global economy this year, registering a 3.9% increase in real GDP compared to 1.0% for advanced markets.
Asia Pacific is at the centre of this surge. China, India, the Philippines and Vietnam will grow more than 5% each this year. China remains a key driver of the global economy. But the country’s slowed post-pandemic recovery and deepening real estate woes raise concerns about sustained momentum into 2024.
Global inflation slows but at different speeds across markets
Global inflation will continue to decelerate from 9.0% in 2022 to 7.0% in 2023.
Declines in demand and stagnant economic activity are easing inflationary pressures. At the same time, commodity prices in food and energy, resulting from the war in Ukraine, have been further abating.
However, the Q3 global inflation forecast increased 0.1 percentage point compared to Q2 and is still significantly higher relative to the historical trend. Tighter monetary policies should be expected as a result to help combat elevated price pressures.
Diverging trends are apparent between economies. Brazil and Spain, for example, saw inflation fall below their central banks’ targets in June to 3.2% and 1.6%, respectively. But inflation in the UK remained persistently high at 7.3%. Inflation is now primarily driven by factors like wage growth and a surge in demand for services, which are stronger in some markets than others.
Inflation is set to slow in 2024 from high interest rates globally and cooling economic activity.
Top Risks and Scenarios
1. The war in Ukraine
The war in Ukraine remains the primary downside risk to the global economy in 2023. Further escalation jeopardises social and economic stability.
Russia’s termination of the Black Sea Grain Initiative, for example, could severely threaten global food security and reinforce price pressures.
2. Downside scenarios
China, the US and Eurozone are highly vulnerable to further shocks with the real estate market, financial stability and energy security, respectively, at risk.
Downside scenarios in any of these major economies would have severe global spillover effects.
3. Debt distress
Global debt rapidly surged in recent years, impacting emerging countries, in particular.
The risk of debt distress with negative spillover effects on economic activity and overall stability has increased substantially as borrowing costs hit new highs.
4. Climate change
The increasing frequency of extreme weather events presents multiple long-term economic risks.
Climate-related production losses across regions in Q3 could severely disrupt the already vulnerable global food supply.
The main scenario threatening the global economy is stagflation: a stagnation in economic activity combined with high inflation.
In the global stagflation scenario, the economy comes under significant pressure as growth risks materialise. Real GDP slows to 0.6% in 2023 and 0.2% in 2024. Energy supply, pricing uncertainty and high interest rates deteriorate business confidence and investments, which could lead to this outcome.
A new risk scenario identified in Q3 is global fragmentation. Here, the global economy becomes progressively fragmented with economies dividing into multiple blocs.
Real GDP grows at 2.5% in 2023 and 2.0% in 2024. Businesses could face higher costs and reduced access to markets while consumers experience higher prices and limited options.
Another scenario that impedes global economic prospects: a US hard landing. A national banking crisis and falling private sector confidence could result in a sharp slowdown of the US economy with negative spillover effects globally.
US
The US economy remains resilient in Q3, prompting an upward revision of 0.3 percentage points to the country’s real GDP baseline growth forecast, which now sits at 1.2% this year. Steady consumer spending and a strong labour market are the primary drivers.
In Q3, business and consumer confidence sees a slight uptick. Unexpected resilience in the US economy to date has generated cautious optimism that a recession can be avoided.
Recessionary concerns are easing, but numerous headwinds will challenge economic growth potential.
US inflation continues to shrink from record-high peaks. In July 2023, inflation stood at 3.2%. A downward revision of 0.1 percentage point in Q3 puts the country’s inflation forecast at 4.1% for the year.
The labour market has been unusually tight since the pandemic. Consequently, wage pressures became a primary driver of inflation in the US. High-interest rates are expected to cool the labour market in the months ahead, which will further slow inflation.
The Federal Reserve increased interest rates by 25 basis points again in July, which now sits at 5.25% to 5.5%. But this could be the final increase in their rate-hiking cycle as inflation decelerates and pressure around consumer spending intensifies.
CHINA
China’s economic growth lost steam in Q2 after a strong post-pandemic recovery at the start of the year. The country’s real GDP is expected to grow 5.3% this year—higher than 2022 but lower than the annual average of 7.7% from 2010 to 2019.
Inflation continues to decline with another downward quarterly revision for 2023. The latest projection puts inflation at 1.9% in China this year.
Consumer prices dropped in July—the first decrease since February 2021. Producer prices continued to decline due to lower commodity and raw material prices, easing supply chains and weaker demand.
Four challenges weigh on China’s outlook: slowed economic recovery, lower business investment, intensifying deflationary pressures and the growing risk of deeper slumps in the property and financial markets.
Business and consumer confidence remains weak. The government pledged to reduce market barriers, improve competition policies and enhance the business environment for private companies, but additional measures may be needed to restore confidence and support the economic rebound.
EUROZONE
The Eurozone saw an upward revision of 0.1 percentage point to real GDP growth, which sits at 0.6% in 2023. Growth has been stagnant and is expected to remain weak in the short term.
Inflation in the Eurozone continues to decelerate and saw a 0.2 percentage point revision this quarter. The latest forecast sits at 5.7% for the bloc in 2023. Declining energy prices and rising interest rates help prevent further spikes.
In the months ahead, overall inflation should moderate further, but core inflation (which excludes food and energy) could stay elevated due to tight labour markets.
The European Central Bank (ECB) raised its key interest rates by 25 basis points in July to 4.25%. Another hike in September is possible, but the downward trend of inflation and recessionary concerns could halt an upcoming increase.
The outlook remains uncertain in a highly volatile environment. The Eurozone faces weak foreign demand with China and the US underperforming in 2024. And the ongoing war in Ukraine continues to present substantial risks to the bloc’s economy.
Recessionary risks are also looming. Additional interest rate hikes with stagnant growth could lead to a sharp economic contraction in the remainder of the year.
Strong labour markets and a resilient services sector drove gradual improvements to global economic projections for the year. However, a sharp slowdown persists due to high inflation, rising interest rates and unstable financial conditions.
Global real GDP is expected to grow 2.6% in 2023—an increase from the 2.5% forecast in Q2 and the 2.3% forecast in Q1. Inflation continues to decelerate from 2022 but remains elevated. The latest data puts inflation at 7.0% this year—up slightly from the 6.9% projected last quarter.
Gradual improvements but fragile outlook
The global economic outlook slightly improved based on Q3 forecasts but sits far behind long-term growth trends. Labour markets and the services sector prove resilient, showing optimistic signs ahead.
But lingering inflation and the lagged effect of high borrowing costs will dampen economic prospects in 2024.
Weak growth expected in the US and Eurozone
The US and Eurozone will record weak growth in 2023. Despite headwinds, real GDP is expected to remain slow at 1.2% in the US and 0.6% in the Eurozone; though, subtly increasing from Q2 estimations of 0.9% and 0.5%, respectively. But these projections are behind historical economic performance for each region.
The US has repeatedly surprised to the upside and pulled ahead of the Eurozone after both economies saw a 0.2% growth forecast in Q1.
Emerging markets outperform advanced economies
Emerging markets remain the growth engine of the global economy this year, registering a 3.9% increase in real GDP compared to 1.0% for advanced markets.
Asia Pacific is at the centre of this surge. China, India, the Philippines and Vietnam will grow more than 5% each this year. China remains a key driver of the global economy. But the country’s slowed post-pandemic recovery and deepening real estate woes raise concerns about sustained momentum into 2024.
Global inflation slows but at different speeds across markets
Global inflation will continue to decelerate from 9.0% in 2022 to 7.0% in 2023.
Declines in demand and stagnant economic activity are easing inflationary pressures. At the same time, commodity prices in food and energy, resulting from the war in Ukraine, have been further abating.
However, the Q3 global inflation forecast increased 0.1 percentage point compared to Q2 and is still significantly higher relative to the historical trend. Tighter monetary policies should be expected as a result to help combat elevated price pressures.
Diverging trends are apparent between economies. Brazil and Spain, for example, saw inflation fall below their central banks’ targets in June to 3.2% and 1.6%, respectively. But inflation in the UK remained persistently high at 7.3%. Inflation is now primarily driven by factors like wage growth and a surge in demand for services, which are stronger in some markets than others.
Inflation is set to slow in 2024 from high interest rates globally and cooling economic activity.
Top Risks and Scenarios
1. The war in Ukraine
The war in Ukraine remains the primary downside risk to the global economy in 2023. Further escalation jeopardises social and economic stability.
Russia’s termination of the Black Sea Grain Initiative, for example, could severely threaten global food security and reinforce price pressures.
2. Downside scenarios
China, the US and Eurozone are highly vulnerable to further shocks with the real estate market, financial stability and energy security, respectively, at risk.
Downside scenarios in any of these major economies would have severe global spillover effects.
3. Debt distress
Global debt rapidly surged in recent years, impacting emerging countries, in particular.
The risk of debt distress with negative spillover effects on economic activity and overall stability has increased substantially as borrowing costs hit new highs.
4. Climate change
The increasing frequency of extreme weather events presents multiple long-term economic risks.
Climate-related production losses across regions in Q3 could severely disrupt the already vulnerable global food supply.
The main scenario threatening the global economy is stagflation: a stagnation in economic activity combined with high inflation.
In the global stagflation scenario, the economy comes under significant pressure as growth risks materialise. Real GDP slows to 0.6% in 2023 and 0.2% in 2024. Energy supply, pricing uncertainty and high interest rates deteriorate business confidence and investments, which could lead to this outcome.
A new risk scenario identified in Q3 is global fragmentation. Here, the global economy becomes progressively fragmented with economies dividing into multiple blocs.
Real GDP grows at 2.5% in 2023 and 2.0% in 2024. Businesses could face higher costs and reduced access to markets while consumers experience higher prices and limited options.
Another scenario that impedes global economic prospects: a US hard landing. A national banking crisis and falling private sector confidence could result in a sharp slowdown of the US economy with negative spillover effects globally.
US
The US economy remains resilient in Q3, prompting an upward revision of 0.3 percentage points to the country’s real GDP baseline growth forecast, which now sits at 1.2% this year. Steady consumer spending and a strong labour market are the primary drivers.
In Q3, business and consumer confidence sees a slight uptick. Unexpected resilience in the US economy to date has generated cautious optimism that a recession can be avoided.
Recessionary concerns are easing, but numerous headwinds will challenge economic growth potential.
US inflation continues to shrink from record-high peaks. In July 2023, inflation stood at 3.2%. A downward revision of 0.1 percentage point in Q3 puts the country’s inflation forecast at 4.1% for the year.
The labour market has been unusually tight since the pandemic. Consequently, wage pressures became a primary driver of inflation in the US. High-interest rates are expected to cool the labour market in the months ahead, which will further slow inflation.
The Federal Reserve increased interest rates by 25 basis points again in July, which now sits at 5.25% to 5.5%. But this could be the final increase in their rate-hiking cycle as inflation decelerates and pressure around consumer spending intensifies.
CHINA
China’s economic growth lost steam in Q2 after a strong post-pandemic recovery at the start of the year. The country’s real GDP is expected to grow 5.3% this year—higher than 2022 but lower than the annual average of 7.7% from 2010 to 2019.
Inflation continues to decline with another downward quarterly revision for 2023. The latest projection puts inflation at 1.9% in China this year.
Consumer prices dropped in July—the first decrease since February 2021. Producer prices continued to decline due to lower commodity and raw material prices, easing supply chains and weaker demand.
Four challenges weigh on China’s outlook: slowed economic recovery, lower business investment, intensifying deflationary pressures and the growing risk of deeper slumps in the property and financial markets.
Business and consumer confidence remains weak. The government pledged to reduce market barriers, improve competition policies and enhance the business environment for private companies, but additional measures may be needed to restore confidence and support the economic rebound.
EUROZONE
The Eurozone saw an upward revision of 0.1 percentage point to real GDP growth, which sits at 0.6% in 2023. Growth has been stagnant and is expected to remain weak in the short term.
Inflation in the Eurozone continues to decelerate and saw a 0.2 percentage point revision this quarter. The latest forecast sits at 5.7% for the bloc in 2023. Declining energy prices and rising interest rates help prevent further spikes.
In the months ahead, overall inflation should moderate further, but core inflation (which excludes food and energy) could stay elevated due to tight labour markets.
The European Central Bank (ECB) raised its key interest rates by 25 basis points in July to 4.25%. Another hike in September is possible, but the downward trend of inflation and recessionary concerns could halt an upcoming increase.
The outlook remains uncertain in a highly volatile environment. The Eurozone faces weak foreign demand with China and the US underperforming in 2024. And the ongoing war in Ukraine continues to present substantial risks to the bloc’s economy.
Recessionary risks are also looming. Additional interest rate hikes with stagnant growth could lead to a sharp economic contraction in the remainder of the year.
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