Global economy slows, but seems set to avoid recession

Business surveys released Wednesday pointed to declines in output across Europe’s largest economies in November, cementing expectations that high energy prices are likely to push them into contraction during the final quarter of this year and the first quarter of next.

Some economists think it is possible the US economy will also suffer two straight quarters of contraction in the first half of next year in response to rapid tightening of monetary policy by the Federal Reserve, although that is far from certain.

But even with a weak start to 2023 expected in many of the world’s richest countries, economists are wary of forecasting a global recession, which is commonly defined as a rate of annual output growth that falls below the rate of population growth—currently around 1% .

In practical terms, this means the deterioration in economic conditions many nations, businesses and consumers around the world have experienced this year is likely to continue next year—with strong regional variations—, but the drop may not be as severe as feared just a few months ago, and it could reach a bottom in the course of the year.

“Even though we do not formally forecast a global recession from a narrow technical viewpoint, it will feel like one for large parts of the global economy,” said Marcelo Carvalho, global head of economics at BNP Paribas.

With China expected to rebound from an unusually weak 2022, many forecasters see global output rising by around 2% next year, a sharp deceleration from this year and well below its 3.3% average in the decade leading up to the start of the Covid-19 pandemic, but still producing a small rise in output per person.

Europe’s economies face the strongest headwinds in the months ahead, following Moscow’s decision to throttle natural-gas supplies to undermine Western support for Kyiv. Russian natural-gas giant Gazprom PJSC on Tuesday threatened to further throttle exports to Europe via Ukraine from next week, putting into question one of the last remaining routes for Russian gas to reach Europe.

The economic cost of higher energy prices was laid bare in surveys of purchasing managers at European businesses, which recorded another month of declining activity in November. S&P Global said its composite output index for the eurozone, which includes services and manufacturing activity, rose to 47.8 in November from 47.3 in October, remaining below the 50 mark that distinguishes a contraction from an expansion.

“A recession looks likely, although the latest data provide hope that the scale of the downturn may not be as severe as previously feared,” said Chris Williamson, chief business economist at S&P Global.

In the near term, Europe seems likely to avoid the worst outcomes that policy makers had feared as they prepared for a surge in energy demand over the winter months. A mild October and high levels of gas storage make it less likely that Europe’s factories will face energy rationing. As a result, economists at Barclays expect their worst-case scenario of a 5% decline in gross domestic product to be avoided, but continue to see a 1.3% drop as likely.

European governments have acted quickly to provide help to households and businesses facing higher energy costs, and that has helped support a modest rebound in consumer confidence from record lows in September. And with natural-gas prices having fallen from August highs, some manufacturers have added back some previously reduced output, including fertilizer maker Yara International ASA.

However, getting through this winter without rationing won’t mark the end of Europe’s energy problems. Natural-gas reserves for the winter of 2023 will likely have to be rebuilt with even lower supplies from Russia than this year, and with greater competition for liquefied natural gas from a faster-growing Chinese economy.

Energy prices are also likely to remain high throughout next year and beyond, making it difficult for some factories to cover their costs. According to a survey of members of the European Round Table for Industry by the Conference Board also released Wednesday, 15% of the group’s largest manufacturers are planning to permanently end some production on the continent.

Going into 2023, the outlook for Europe’s economies remains downbeat, even if the worst has not come to pass. That is particularly true of countries in Eastern Europe that border on or are close to Russia.

“I don’t think we see an improvement,” said Beata Javorcik, chief economist at the European Bank for Reconstruction and Development. “I don’t think we see many green shoots.”

The greatest uncertainty facing the US economy is how far the Fed will need to raise rates in order to reduce stubbornly high inflation.

The outlook for China’s economy is also highly uncertain as the government eases some of the restrictions associated with its zero-Covid policy and weak growth this year. Economists see a gradual reduction in lockdowns that affect major industrial centers as key to an expected rebound in growth next year, but a recent surge in infections has raised questions about how quickly that can proceed.

“This fine-tuning of its Covid-19 policy is now being tested as cases continue to climb, especially in its manufacturing hub of Guangzhou,” said Magdalene Teo, head of fixed income research in Asia for Julius Baer. “China is realizing that reopening this winter will not be easy.”

As in Europe, economists warn that it is more likely that the economy will slow more sharply than expected than that it will expand more strongly, thereby edging the world closer to recession.

“The risks that things could go wrong are increasing compared to where they were in the past few months,” said Alvaro Pereira, acting chief economist at the Organization for Economic Cooperation and Development.

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