Opinion Could there be a global recession in 2023? The signals are mixed

In the third quarter, however, the US economy grew by 3.2 per cent, signalling a significant recovery. The latest BEA advance estimates show that the US real GDP increased at an annual rate of 2.9 per cent in the fourth quarter. Despite the slight decrease from the third quarter, the continued expansion of the US economy at the end of 2022 marks a positive sign, soothing concerns about a recession in 2023.

The positive growth in the fourth quarter can primarily be attributed to consumer spending, which increased by an annualised rate of 2.1 per cent, and private inventory investment that showed an upturn in 2022. These movements were partially offset by decreases in residential fixed investments and exports. Overall, the US real GDP increased by 2.1 per cent at an annual level in 2022. Although a significant decline from the 5.9 per cent increase in 2021, the difference accounts for the enthused post-Covid economic recovery in 2021.

The US labour market continues to remain robust. The unemployment rate was recorded at a low of 3.5 per cent in December 2022, matching the pre-pandemic levels. Also, the total non-farm payroll employment increased by 2,23,000 in December, exceeding the Dow Jones estimate of 2,00,000. While the labour market remains tight, US inflation has eased in the last few months. Consumer prices fell 0.1 per cent in December — the largest month-over-month decrease since April 2020, due to reductions in motor vehicle and gasoline prices.

Another Labour Department report highlighted that the initial weekly claims for unemployment insurance fell by 6,000 to a seasonally adjusted advance estimate of 1,86,000, for the week ending January 21 — the lowest since April 2022. Although not a perfect association, the decline in jobless claims in January shows that the mass layoffs in recent weeks, particularly in the tech sector, have not yet translated into a rise in claims, suggesting the possibility of finding new jobs.

The reopening of China’s borders is another major event of 2023 that can have positive implications for the global economy. As China resumes its economic activities to pre-Covid levels by boosting growth, domestic consumption is expected to increase significantly. With the ease of trans-border movement and eventual increase in exports of consumer and industrial goods, global trade is expected to strengthen as well.

While positive signs are being seen, the possibility of a global recession in 2023 cannot be dismissed. Elevated inflation continues to be a cause for global concern. Despite the fall in consumer prices, the headline CPI for the US showed an annual increase of 6.5 per cent in December 2022. While this is the smallest annual rise since October 2021, it still remains substantially above the US Federal Reserve’s (the Fed) 2 per cent target. In spite of the slow-paced increase in headline CPI, persistent elevation in core inflation (excluding food and energy) continues to be a major issue across economies.

Data from December 2022 shows that core inflation (excluding food and energy) on a year-on-year basis increased to 5.7 per cent in the US; 6.3 per cent in the UK, while that for the Eurozone jumped to a record high of 5.2 per cent. Consequently, the central banks of these economies are expected to continue with interest rate hikes in the coming months. On an annualised level, the CPI inflation in Australia also jumped to 7.8 per cent in the 2022 fourth quarter, increasing the likelihood of respective interest rate hikes as well.

Moreover, an increase in China’s demand for goods post-reopening could drive up commodity prices, thereby creating an inflationary impact. For instance, China’s increased demand for natural gas would mean more competition with the European market, leading to higher commodity prices that can put further inflationary pressures on Europeans already dealing with high energy bills.

Despite markets expecting a moderate pace of rate hikes and eventually a pause, the Fed officials have been hawkish in their commentary and have indicated that they would require substantial evidence of softening of the labour market and associated price pressures before pausing rate rises. The Fed has aggressively executed a series of interest rate hikes since March 2022, raising the Federal Funds rate by 4.25 percentage points — the highest since 2007.

Rising interest rates would incur even higher borrowing costs that could dampen consumer spending. Retail sales fell by 1.1 per cent in December in the US, suggesting signs of weakening consumer spending; while sectors sensitive to high borrowing costs such as housing and construction have slowed down significantly. The question of how much is too much looms large, as the impact of rate hikes is felt gradually, potentially inducing an economic slowdown.

The prevalence of mixed signals suggests that the onset and depth of a global recession in 2023 are not certain.

The writer is Consultant-Research Fellow, NIPFP. Views are personal