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Cheer. The economic outlook for 2023 is better than you think

Cheer. The economic outlook for 2023 is better than you think

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End-2022 economist surveys in the US, eurozone and UK were incessantly gloomy, replete with predictions of a recession, higher unemployment and persistent inflation problems. IMF chief Kristalina Georgieva speaks of a tougher 12 months and expects a third of the world to experience a recession. It’s depressing. Fortunately, these narratives are probably wrong. We should all cheer up a little.

The evidence suggests that economic performance in 2023 won’t be as bad as most economists say. We will probably end the year richer, safer and happier than when we started.

There is no doubt that the global backdrop for 2023 is difficult. Households and businesses have weathered a pandemic, inflation, record high energy bills and a food price crisis in the past three years. But its worst effects are already over.

Part of my greater optimism, therefore, rests on an important and almost universal miscommunication of economic forecasts. Far too often past events are presented as yet to come.

For example, the latest IMF forecasts in October predicted a decline in global growth from 3.2 percent in 2022 to 2.7 percent in 2023. This underpinned Georgieva’s statement that this year will be “tougher than the year we are leaving behind “. The problem is that the information conveying these compound annual growth rates doesn’t square with most people’s reasonable interpretation.

It may surprise you that in the fund’s case, the relatively strong 2022 reading is caused by the quick end of lockdown growth in late 2021, and the weak 2023 forecast is mainly caused by last year’s energy crisis.

Translated into an economic activity that only occurs within the year in question – which is what most people would expect from a forecast – the story changes completely. In contrast to a more difficult year, the IMF expects the global economy to grow 2.7 percent in 2023, significantly more than the 1.7 percent it expects for 2022.

The IMF is far from alone in presenting growth forecasts that its own officials find difficult to articulate. The OECD said in November that growth in advanced economies would slow in 2023, but that quarterly projections The same publication indicates that growth in advanced economies will improve each quarter this year. Most people would see that as progress, not decline.

These failures in translating numerical predictions into a compelling, accurate narrative should concern us. They create unnecessarily gloomy prospects that have self-fulfilling qualities.

Recognizing these presentation issues should make us happier for 2023. But few Financial Times readers will have missed a second problem with these forecasts: they are severely out of date. Any assessment of the year ahead must also take into account two important changes in assumptions that underpin the global outlook.

The first reflects natural gas prices. The IMF and OECD forecasts were all made in autumn and are based on the financial market expectations for future natural gas prices at the time. For example, the OECD expects average European wholesale gas prices to be €150 per MWh this year and next.

Current market expectations assume prices are about half as high. The easing of the energy crisis is an undiminished boost for the European economic outlook. Lower energy prices will improve prospects for income, growth and public finances while lowering headline inflation. These are crucial for Europe as a major energy importer.

The second change in assumptions must take into account that China is ending its zero-Covid policy. The virus is causing misery for many, but deregulation should prove positive for both the Chinese and global economic outlook later this year.

India’s devastating delta variant wave in spring 2021 caused gross domestic product to fall by more than 8 percent in the second quarter of this year, followed by a corresponding increase in the third quarter and a further 5 percent increase in the fourth quarter. After the current wave of infections, China’s economic recovery is likely to be stronger as the ending of the lockdown will ease the pressure on the supply chain. Global trade constraints should improve.

Of course, we should not let ourselves be carried away by a wave of optimism. Even as inflation falls, struggles between workers, businesses and taxpayers over the accumulated losses from the economic crises of recent years may continue. As Olivier Blanchard, former chief economist at the IMF, has warned, these could keep inflation too high for too long. Likewise, uncertainty about the severity of these conflicts is such that central banks could overdo inflation control and undermine economic progress. Macroeconomic policy mistakes are therefore quite likely in 2023.

But insecurities of this kind are a constant fact of life. As the year begins, we can say the following with some confidence. Almost all current projections indicate that global economic growth is likely to improve in 2023, and future projections are set to become even more optimistic. Contrary to the gloomy comments from economists and officials, we should be cautiously optimistic for the year ahead.

chris.giles@ft.com

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