WASHINGTON—The Peterson Institute for International Economics (PIIE) today announced its Fall 2023 Global Economic Prospects, projecting that a soft landing is likely but not assured for the global economy. After growing 3.4 percent in 2022, global GDP will expand 3 percent in 2023 and 2.8 percent in 2024.
"While inflation appears to be receding in most countries, it remains decidedly above central bank targets. As a result, most central banks will need to keep their policy rates high over the coming year, with the resulting tight financial conditions holding back demand and slowing economic activity. However, the available information suggests that most countries will experience below-trend-but-positive growth as inflation moderates, not recessions," Karen Dynan, PIIE nonresident senior fellow, said in presenting the projections.
Outlook for the US economy
The US economy has seen more solid growth this year than previously expected, but Dynan expects that higher interest rates will dampen growth momentum going forward. Economic activity appears to have accelerated in the third quarter of 2023 but should see a lull in the fourth quarter owing to the strike by the United Automobile Workers (UAW), restart of student loan payments, and a probable government shutdown. Dynan forecasts that US real GDP will remain below its potential level throughout next year, with growth moderating from 2.2 percent this year to 1.6 percent in 2024. Meanwhile the unemployment rate will rise modestly from its current level of 3.8 percent to 4.2 percent by the end of 2024.
This soft-landing scenario is consistent with incoming data suggesting that the US labor market has made considerable progress toward rebalancing and that underlying US inflation is subsiding. However, with inflation still well above the Federal Reserve's target level, Dynan forecasts that the Fed will raise the policy rate by a further 0.25 percentage point at its December 2023 meeting to a peak of between 5.5 and 5.75 percent. The Fed is likely to keep the policy rate on hold until the fall of 2024 when the 12-month change in core personal consumption expenditures (PCE) inflation sinks below 3 percent. At that point, Dynan expects the Fed to begin to slowly cut rates, with the policy rate returning to a neutral level only after a couple of years. She forecasts core PCE inflation (on a four-quarter basis) of 3.8 percent in 2023 and 2.8 percent in 2024.
Outlook for other large economies
Most other large economies will see different degrees of subdued growth in 2024. As in the United States, restrictive financial conditions will hold back economic activity in the euro area and the United Kingdom, with the latter having recently entered a mild recession. PIIE projects that, on a year-over-year basis, UK real GDP growth will decline 0.3 percent in 2023 and 0.2 percent in 2024. European growth may pick up a bit in 2024, but the recovery there remains fragile. PIIE projects euro area real GDP growth to be 0.6 percent in 2023 and 1 percent in 2024. Chinese economic growth continues to wobble as relatively modest stimulus measures are more than offset by lingering effects of the property crisis, weak consumer demand, and unsustainable local government debt. PIIE projects Chinese real GDP will grow 5.1 percent in 2023 and 4.5 percent in 2024. Growth is likely to remain solid in both India (6.3 percent in 2023 and 6.0 percent in 2024) and Japan (1.8 percent in 2023 and 1.3 percent in 2024), albeit slower in 2024 than it was in 2023. Japan's growth has surprised to the upside in 2023, with its economy having experienced a boost from a pick-up in tourism after a delayed reopening from COVID-19.
Dynan highlighted three risk scenarios, all of which could eventually result in the United States and some other countries entering recessions:
- Risk scenario one: Underlying demand (particularly in the United States) may be stronger than the current consensus given potentially sizable amounts of excess savings and support to income from strong labor markets. In this case, the Fed may need to tighten considerably further, which increases the chance of a hard landing.
- Risk scenario two: Onset of a global malaise in which a European recession, a weakening Chinese economy (and its spillovers to the rest of Asia), and a troubled US banking sector dampen demand considerably further and monetary policy is not able to respond quickly enough to avoid a recession.
- Risk scenario three: Inflation could materially reaccelerate because of developments in global commodity markets that push up energy and food prices or significant further disruptions to supply chains. This scenario would be especially challenging for the Fed and other central banks—with more tightening amid an economy already weakened by the supply shocks.
Alejandro Werner, PIIE nonresident senior fellow, discussed the drivers behind Latin America's better-than-expected recovery from the macroeconomic shocks of the COVID-19 experience. A capacity to implement strong countercyclical policies and supportive commodity prices were, among other factors, responsible for the rebound, as detailed in a new PIIE Working Paper by Werner and José F. Ursúa.
As the Latin American economies approach their new long-term potential levels and as stimulative policies are removed, regional growth in 2023 will be slightly below potential at around 2 percent. Latin American central bankers acted immediately following the global inflation shock. The region's history with inflation makes it much more susceptible to a deanchoring of inflation expectations, and monetary authorities viewed the rise in headline inflation as warranting a swift response. These policy actions avoided an increase in medium-term inflation expectations and were rewarded by markets as portfolio flows returned to the region. With a significant drop in headline inflation and core inflation beginning a gradual decline in most countries, it is time to bring monetary tightening to more normal levels, Werner contended.
Social unrest, political polarization, and democratic backsliding are additional factors that have weighed on the region during the last decade. In the next 12 months, contested and polarized elections will take place in two of the three G20 countries of the region: Argentina and Mexico. This electoral uncertainty represents a risk to the economic outlook in these nations.
Finally, the region's lackluster productivity will continue to limit medium-term growth. However, the energy transition and the relocation of manufacturing activity from China are two factors that can support better regional growth prospects in the next decade.
Werner argued that domestic reforms will be needed to turn these shocks into an opportunity that enhances growth fundamentals.
Arvind Subramanian, PIIE senior fellow, presented on the short-term challenges and medium-term opportunities for India. The economy recovered strongly from the COVID-19 pandemic based on surging exports especially of services and rising government investment. That dynamism, however, may have started to ebb in line with declining exports and rising oil prices. A patchy start to the monsoon rainy season has cast uncertainty on the outlook for agriculture. Data challenges have obscured understanding of cyclical developments.
India's medium-term opportunities remain promising. Geopolitics and slowing growth in China have led to the reemergence of India as a promising, alternative investment destination, illustrated most prominently in Apple's decision earlier in 2023 to establish production facilities in India. Along with this investment surge, India's growth trajectory could be durably elevated by continuing services globalization to create jobs for India's skilled labor as well as by strengthening bank balance sheets through recapitalization. To realize these opportunities, however, the country will need to improve policymaking in two key areas: ensuring a level playing field for both domestic and foreign investors and reversing its protectionist drift of the last few years.
Michele Heller, PIIE director of strategic communications and media relations, [email protected]
The Peterson Institute for International Economics is an independent nonprofit, nonpartisan research organization dedicated to strengthening prosperity and human welfare in the global economy through expert analysis and practical policy solutions.