Global economic outlook (Q2 2023)

Author: MAPFRE Economics

Summary of the report’s conclusions:
MAPFRE Economics
  2023 Economic and industry outlook:
second quarter perspectives 

Madrid, Fundación MAPFRE, April 2023

Despite the current environment, in which the world has lost the capacity for long-term growth, it can be seen how, thanks to improved performance and a greater contribution from all the economic regions of the world, at the beginning of 2023 the global economy has improved growth prospects for 2023 and 2024, compared to what was anticipated in our previous 2023 Economic and Industry Outlook report (see Chart 1).

Thus, the risk of recession emanating from a large part of the developed economies (mainly the Eurozone) has eased and, thanks to the acceleration of the economy in the short term, the foundations have been strengthened for growth that, in general terms, is expected to be more benign. However, this moderate optimism remains insufficient to avoid the risks of the “hard landing” contemplated during 2022, compounded by recent signs of financial instability coming from the banking sector on both sides of the Atlantic.

In this sense, the cyclical momentum is expected to remain in the stagflationary phase, with a fragile pace of activity and below potential, together with a visibly more punitive monetary policy on the demand side, while inflation is expected to remain above the targets set by the main central banks, although under a downward dynamic that could show some volatility compared to the previous year in some components such as energy or food.

Chart 1

Global: growth and inflation outlook and contribution by region

In response to the positive supply catalysts, the supply chains have continued on the path of normalization supported by the moderation in the prices of raw materials, the dynamism of the services sector and the gain in traction of China with its reopening process. On the other hand, geopolitical tensions have continued to frustrate the full fluidity of global trade, crystallizing the protectionist current and multipolar fragmentation, mainly around strategic sectors such as semiconductors or certain scarce basic commodities.

With regard to demand factors, optimism is due both to the savings generated during the pandemic that have not yet been consumed, and to the evolution of employment, whose dynamism continues surprisingly on an upward trend, with unemployment rates below the NAIRU (natural rate) and the ratio of vacancies to be filled in permanent imbalance. The job market situation observed at the limit (in the context of frictional unemployment) reveals two relevant dynamics: (i) there is professional mobility between vacancies, probably to take advantage of improved salary income (which explains why the number of vacancies is not significantly reduced) and (ii) during periods of high inflation such as the current one, it responds to changes in activity (as reflected in the sloping Phillips curve), which did not occur in periods with very low inflation.

As a result, this greater dynamism in terms of activity has been leading to a slower inflationary process, with the broad reading reflecting the positive effect of the oxygenation of supply, but with the underlying reading still reflecting the effects of the positive evolution of demand and its lagging momentum from the rotation towards the service sector.

The turbulence in the finance sector has recently been added to this situation, increasing the prospects of additional tightening of loan conditions, already strained per se by the cyclical momentum of monetary policy, given the extension of a more cautious vision regarding the assumption of risks (see Chart 2).

Chart 2

Short-term risk balance: vulnerabilities and global risks

As regards monetary policy, the main central banks have continued advancing in the process of restriction and subsequent normalization, both on the balance sheet side and through interest rates, in an effort to slow down the credit cycle that is channeled towards lower demand, through stricter access standards, thus controlling inflation. To date, that effort has driven interest rates into restrictive territory at a record high rate. However, further developments are expected to be more marginal, allowing for an eventual acceleration in activity and for concerns over price stability shifting towards a focus on financial stability.

In short, the global outlook receives a moderately positive boost thanks to a calmer than anticipated start to the year, as well as uncertainties (such as the tail risks for 2022) that are clearing up, at least partially. This occurs, however, in a context in which it is recognized that global potential growth has fallen below 3%. At the same time, new fragilities are emerging in the financial system that remind us that perhaps the effects of the monetary overreaction are yet to come. Likewise, despite the fact that up to now it seems that the worst is now behind us, inflation has seen the downward pressure reduced and, with it its, rate of decline, leaving the main central banks faced with the complex dilemma between the search for price stability and financial stability. This is a dichotomy that can transition from a relatively benign baseline scenario to a risky one with relative fluidity, and where the effects of monetary policy lead to a harder landing.

Full analysis of the economic and industry perspectives with additional information and interactive charts on the Eurozone, Germany, Italy, Spain, the United Kingdom, the United States, Brazil, Mexico, Argentina, Turkey, Japan, China and the Philippines can be found in the report entitled 2023 Economic and Industry Outlook: Second Quarter Perspectives, compiled by MAPFRE Economics and available at the following link:

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