“2023 will be even harder for most economies in the world than 2022.” Kristalina Georgieva, top woman of the International Monetary Fund, makes no bones about it. China and Europe will be particularly hard hit.
Where do these ominous messages suddenly come from? Wasn’t our economy going in the right direction?
When the top woman of the International Monetary Fund (IMF) speaks, people listen. Bulgarian Kristalina Georgieva gave her economic outlook on 2023 in an interview with the American news channel CBS News. There was not much positive news to be had. “For most of the global economies, 2023 will be a difficult year, more difficult than the year we are leaving behind,” says Georgieva. “Why? Because the three largest economies – the United States, the European Union and China – are all seeing their economic growth slow down at the same time. One-third of the global economy is heading into recession.”
Georgieva relies on the forecasts published by the IMF in October. It stated that global growth would fall from 3.2 to 2.7 percent. These forecasts are adjusted every six months, with an interim update this month.
What are the main causes of these economic difficulties?
There are three main reasons that reinforce each other: the Russian invasion of Ukraine, life that has become increasingly expensive due to exploding inflation and the growth slowdown in China.
Georgieva took a long time to think about the latter in particular. The abandonment of the zero-covid policy in China threatens to make the situation there even more disastrous. “For the first time in 40 years, economic growth there will be equal to or even worse than global growth. Until a few months ago, the supply problems were due to the closure of an entire city or region, but now many employees are going to be too sick to work. And we will see that in global supply chains, which will be even more disrupted.”
Economist Geert Noels sees one here blessing in disguise. “Due to the reduced demand, there will be less pressure on energy and commodity prices. And that in turn would be positive news for reducing inflation. Although we should certainly not be under any illusions: in China, President Xi Jinping will do everything he can to stimulate demand. Due to the limited transparency, he has enormous possibilities to control everything. He doesn’t have to worry about a number of things, just think of an aging population or the climate challenges. For us, these are extra handicaps, which can be beneficial in the long term.”
What does all this mean for Europe and Belgium? Did Georgieva have something to say about that too?
Yeah, nothing to cheer about here either. “The European Union has been hit hard by the war in Ukraine. Half of the EU will face a recession in 2023.” Germany and Sweden in particular will be hit hard, with the economy even shrinking in 2023. “I think we will suffer more than is now admitted,” Noels argues. “People are often quite courageous in their statements. So far it’s all going well, but the coming months will be really crucial. That is the focus of most economists.”
Belgium could narrowly avoid a recession – a contraction of the economy in two consecutive quarters. Noels: “But that is rather symbolic. If you ask me, Europe looks the weakest of the three major trading blocs. The threat of a mild or hard recession is the biggest challenge. Rising interest rates always lead to a crisis within the eurozone. Moreover, the labor market in the EU is not flexible, which costs us competitiveness. And the energy issue has not been solved. Those are quite a few big challenges that still lie ahead of us.”
The US therefore seems to be the best off. How did that happen?
It is generally known that the labor market in the United States is much less regulated than in Europe. “The US is the most resilient,” Georgieva puts it. “And in this way a recession can possibly be avoided. The labor market remains extremely strong.”
Noels: “It is a flexible economy, where wages have risen but not as fast as inflation. And so it has been able to strengthen its competitiveness. Also, America is not so hard to contend with the high energy prices. Partly thanks to its shale gas, it provides for its own energy production.”
A major disadvantage of the strong labor market is that the US central bank, the Fed, will have to keep policy rates high for much longer in order to bring inflation down. This in turn has consequences for developing countries, which have borrowed in cheap dollars. That will become much more expensive from now on, making it difficult for them to pay off their debts.
Georgieva: “It concerns countries such as Chad, Ethiopia, Zambia, Ghana, Lebanon, Suriname and Sri Lanka. We must help these countries, but that will not have a major impact on the global economy for the time being. If that list continues to grow, we may be faced with unpleasant surprises.”