- Author, Cristina J. Orga
- Role, Journalist, BBC World
Photo credit, Media Lens King via Getty Images
The worst in terms of inflation is probably over.
At least that is what the consensus of economists and major economic organizations such as the IMF or the World Bank thinks, following most countries in the world have experienced this year a rise in prices not seen for four decades.
There is no doubt that inflation will continue to hurt the pockets of millions of citizens in 2023, but it will experience a respite with a slow downward trend over the next 12 months.
At the end of this period, the International Monetary Fund predicts that global inflation will have fallen to 4.7%, just under half of its current level.
Of course, experts warn that what happens in each of the world’s major economies is different.
What is happening in Europe is not the same as in the United States or in the rest of the advanced economies or in the emerging countries.
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No more suffering
But many seem to agree that global GDP growth will continue to slow and inflation has peaked.
However, it will remain at elevated levels, in what many have dubbed the “new normal”.
“Everything indicates that inflation in 2023 will be moderate, although it will remain higher than before the pandemic,” Juan Carlos Martínez Lázaro, professor of economics at IE University, told BBC Mundo.
“We will not see a sharp drop. The price of oil has fallen, but it remains high. The same is true for raw materials and there are still certain problems in the global supply chains”, recalls Martínez Lazaro.
“We therefore expect that in 2023 the average inflation rates will be lower than those observed in 2022. But of course this will take time and it is not in 2023 that it will be possible to return to the levels of pre-pandemic inflation. To reach this scenario, we still have to wait several months.”
Indeed, officials of the US Federal Reserve estimate that it will take until 2025 for inflation to return to the institution’s target of around 2%.
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“Many of the market pressures that hit in 2022, such as soaring energy prices, the general cost of living crisis, tax and interest rate hikes, have not yet produced all their effects”, explains Álvaro Antón, head of Iberia for the investment company Abrdn.
That’s why he believes that while there will be regional and national variations, “overall inflation in most developed markets is likely to peak in late 2022 or early 2023,” he adds. .
The other point on which economists agree is that the slowdown in inflation will be linked to the slowdown in growth, which will hurt households on the other hand.
Less activity, more unemployment
Ultimately, if families have to pay more for everything, they can buy less, spend less on other things like travel or new cars.
Especially when it comes to paying more for commodities such as food and energy, where the biggest price increases are concentrated.
Combined with the fact that most central banks have significantly tightened monetary policy and raised interest rates, this translates into lower family consumption and business activity.
It is this last point that can trigger unemployment and pull prices down.
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Shopping just got a whole lot harder
“Technical recessions are likely to occur in several economies during 2023, causing global growth to fall below potential to 2.6% from 3.3% in 2022,” forecast in Scope Ratings.
However, the rating agency rules out that there will be a severe recession in the world or that we will see a global financial crisis next year.
In this environment, with the war in Ukraine and heightened geopolitical tensions, with covid spreading in China, the UK facing a winter of strikes and a cold spell in Europe, economic contraction will be very difficult. to avoid.
Recession for many people
“My forecast for the United States is recession. They must have one. Its current labor market is tighter than ever in the post-war era and, surprisingly, it hasn’t weakened,” says Steven Bell , the company’s chief economist for the EMEA region. Columbia Threadneedle in an interview.
His opinion is shared by other experts. To cool inflation in the United States, they say, the labor market needs some breathing space.
“I think they need a recession. I don’t think it will be deep. It will be mild and the response will be quick, but I think they need it. And Europe is going to have one. also because of the incredible increase in energy prices,” adds Bell.
“And we must not forget that a recession in the developed countries generally leads to a recession in the emerging markets”, adds the economist.
A designation that often includes several Latin American countries.
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Kristalina Georgieva, Managing Director of the IMF
A third of the world economy
The IMF also expects measures to contain the recession to depress many economies.
In fact, International Monetary Fund Director Kristalina Georgieva told a US network CBS news program that they expect up to “one-third of the global economy” to enter into recession next year.
Kristalina Georgieva said 2023 will be “more difficult” than last year as the cycle slows in the United States, the European Union and China, three of the engines of international growth.
“Pessimism has spread for the economic future of 2023. In some regions of the planet, economic, monetary and social risk will shape a highly combustible year”, explains the research team of CIDOB, the Business Center of Barcelona, in collaboration with EsadeGeo.
“The risk that the debt crisis will widen in emerging economies during the year 2023 is increasing.”
“Sri Lanka was the first alarm. Some of the countries that in 2023 will present a more delicate situation are Pakistan, Egypt or Lebanon,” they add.
Photo credit, Philippe Lissac
But despite the fall in the prices of raw materials, especially oil, the agreement to export cereals from Ukraine which has put a stop to food inflation and despite the rise in interest rates, measures all aimed at breaking inflation, there are also those who prefer to remain more skeptical of the 2023 inflation forecast.
“There is a risk that inflation will not come down as the consensus predicts. In fact, the fact that this is what is almost unanimously expected is worrying because the consensus of analysts is more often wrong than right” , says Víctor Alvargonzález, chief strategy officer and founding partner of independent advisory firm Nextep Finance.
In fact, the year 2022 clearly illustrates how far reality can deviate from economists’ forecasts.
Very persistent inflation
At the beginning of the year, the main organizations claimed – almost unanimously – that the double-digit inflation already recorded in many economies was “transitional”. Nothing might be further from reality.
“This inflation might turn out to be much more persistent than expected,” Bell said.
Another danger that might derail the expert consensus: the war in Ukraine might spiral out of control.
“We are in an indirect confrontation between NATO (through the Ukrainian army) and a nuclear power, Russia, so the longer the war lasts, the greater the risk of accidents or war escalations” , says Alvargonzález.
Another negative force that is there, in the shadows, is the hidden confrontation between China and the United States for world power.
“At the moment the United States is busy with Russia, but sooner or later they will realize that their biggest problem is China, which is actually taking advantage of the situation created by the invasion of Ukraine. Just look at Xi Jinping’s last visit to Saudi Arabia and how it was received,” said the Nextep Finance economist.