Economic growth in the United States and Europe in 2023 and 2024 is projected to be below trend, according to analysis presented at the Spring 2023 Peterson Institute for International Economics' Global Economic Prospects.
Demand and output have been more resilient than anticipated, and inflation—although seeming to have peaked in many countries—remains high. As a result, the Federal Reserve and many other central banks will continue to maintain tight financial conditions. In addition, the potential for further turmoil in the banking system increases negative tail risk for economic activity.
Global GDP will increase 2.9 percent in 2023 and 3.1 percent in 2024. US GDP in 2023 is projected to be about 1.3 percent above its 2022 level, and in 2024 is projected to rise 1.0 percent. Core US personal consumption expenditure (PCE) inflation will moderate from a pace of 4.8 percent over the four quarters of 2022 to 3.9 percent over the four quarters of 2023 and 3.2 percent over the four quarters of 2024.
In the United States, incoming data have been stronger than expected, with consumers still having pent-up demand and (in the aggregate) the wherewithal to finance it. US labor demand has eased, but only slightly. Meanwhile, US inflation remains well above the Federal Reserve's target. High inflation continues to impose costs on the economy and on individuals and families: Although many workers have seen higher-than-usual wage growth over the past year, growth in average hourly earnings in many industries has fallen short of price increases.
The recent failures, forced sales, and strains at multiple banks are likely to result in tighter credit conditions as banks respond to the outflow of deposits, stricter supervision, and possible regulatory changes. The extent of this tightening is difficult to measure and predict, but it will probably induce only a modest additional drag on economic activity—and so, the Fed will likely still need to make a couple of further 25 basis point hikes to bring inflation down toward its target.
Based on the available information, below-trend economic growth, with some rise in the unemployment rate, is more likely than a recession in the United States. But risks tilt to the downside because of the possibility of further contagion among banks, the potential for additional inflationary shocks, and the intrinsic difficulties of achieving a soft landing.
Tight financial conditions will constrain economic growth this year and next in many other advanced economies as well. Still, Europe appears to have dodged a recession this winter, and its prospects going forward are brighter than a few months ago. The United Kingdom is projected to lag other advanced economies and see very low or negative growth this year and next given its greater challenges with inflation.
Growth prospects diverge for the major emerging economies. China is rebounding because of its reopening from COVID-19 pandemic shutdowns and a fading drag from its property sector. In India, progress on reforms will bolster activity. By contrast, high interest rates and structural problems will continue to weigh on economic activity in Brazil, and Russia continues to experience fallout from its Ukraine invasion.
This publication does not include a replication package.