The Q4 Global Economic Conditions Survey (GECS) indicates some stabilisation, but many indicators remain weaker than a year ago. The good news is that the GECS Confidence Index increased slightly for the second quarter in a row, possibly reflecting hopes that the worst of the central bank tightening is nearing an end and that China will be able to successfully relax its zero-COVID restrictions.
Nonetheless, the Confidence Index has remained below its median reading since 2012. The other three economic indicators – new orders, capital expenditure (CapEx), and employment – do not provide much good news. CapEx increased marginally but remained below the same-period median; new orders and employment both declined slightly.
Overall, the findings are consistent with a gloomy macroeconomic outlook. The good news is that they do not appear to be at levels consistent with a global recession in 2023, despite the fact that this is many economists’ base-case scenario.
The two GECS “Fear” indices, which reflect respondents’ fears that customers and/or suppliers will go out of business, serve as a good cross-check. Despite the sharp rise in borrowing costs and the prospect of negative corporate earnings growth in 2023, these were few changes from the 2022 Q3 survey.
“What stands out is the improvement in confidence in developed countries – both Western Europe and North America,” said Assad Hameed Khan, head of ACCA Pakistan. The increase in confidence likely reflects hopes that the Russia-Ukraine situation can be contained and that there will be enough natural gas to see Europe through what now appears to be a mild winter. Looking at the weaker emerging markets (particularly Pakistan), 2023 could still be a difficult year, as evidenced by rising sovereign credit concerns and requests for assistance from the International Monetary Fund (IMF). Furthermore, the central bank is under pressure to maintain higher interest rates, monetary tightening, and foreign exchange transaction restrictions (slowing growth even further).”
“This comes as a surprise given the world’s central banks’ rapid tightening of monetary policy. In terms of pace, scale, and breadth, the past 12 months have seen the most aggressive tightening of policy in more than 40 years. It’s odd that this hasn’t had a significant impact on financing conditions or corporate cash flows. However, monetary policy has long and variable lags, suggesting that this may become more of a problem later in 2023.”
Three major uncertainties face the global economy.
First, have central banks overstated or understated the amount of tightening they have imposed?
Second, can China engineer a smooth transition away from zero COVID without additional restrictions?
Third, will wage pressures ease without a significant weakening of the labor market?
One of the unanswered questions from the COVID crisis is whether the combination of early retirement, prolonged illness, and the shift to hybrid working has fundamentally altered the power balance between employers and employees. These altered labor-market dynamics may make it more difficult for central banks to restore core inflation to their 2% targets.
As 2023 progresses, the answers to each of these questions will become clearer.
Read the full GECS report