Recession in 2023? That depends on where you are in the world

20% of the respondents now see an extremely likely chance of a global recession. Image: Unsplash/Christine Roy

Gayle Markovitz

Lead Editor, World Economic Forum

Spencer Feingold

Digital Editor, World Economic Forum
This article is part of:
World Economic Forum Annual Meeting

• Outlook for the global economy is gloomy, according to the World Economic Forum’s Chief Economists Outlook.
• Potential bright spots include easing of inflation and improving consumer sentiment.
• But policymakers face difficult trade-offs and the economic outlook differs across regions.

The economic outlook for 2023 will feel different depending on where you are in the world, according to the World Economic Forum’s Chief Economists Outlook.
While the overall global picture is gloomy and almost 20% of the respondents now see an extremely likely chance of a global recession - double the number as in the previous survey in September - there are significant variations between geographies.
The majority of chief economists expect moderate or strong growth in the Middle East and North Africa and in South Asia, while more than nine out of 10 think growth will be weak in the US and Europe.
The Forum’s economic briefing brings together the thoughts and expectations of leading chief economists from the public and private sectors and this survey was conducted in November and December 2022. Since then, the World Bank has predicted a global recession for 2023, anticipating GDP growth of 1.7%, the slowest pace outside the 2009 and 2020 recessions since 1993.
This outlook will provide the backdrop for the Forum's Annual Meeting that is taking place 16-20 January 2023 in Davos, Switzerland.

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Recession fear: Europe fares poorly

“For Europe this is likely to reflect the deepening impact of the ongoing war in Ukraine as well as the effects of sharp increases in interest rates,” the Forum’s report said. Monetary policy tightening was also seen as hampering the outlook for US growth.
In the latest International Monetary Fund (IMF) predictions, the outlook for global growth was trimmed by 0.2 percentage points, while the forecast for the eurozone was revised down dramatically to 0.5% from 1.2%.
The IMF forecast global growth to slow to 3.2% in 2022 and 2.7% in 2023 from 6.0% in 2021. This is the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the COVID-19 pandemic.

Where do chief economists expect the risk of stagflation? Image: World Economic Forum
On the other side, the Middle East and North Africa and South Asia were seen as the strongest performers. Some economies in that region, including Bangladesh and India, were seen as benefiting from a global trend diversifying away from China.
This diversification and the ongoing backdrop of weak growth and high inflation means that policymakers are facing difficult choices, the report says. Taming inflation without stymying growth is the foremost one and the one that needs considered monetary policy.

Difficult dilemmas

“Policymakers face a dilemma between tightening too much and too little,” the report says. “Fiscal policymakers face significant challenges too, not least because of the greatly reduced fiscal space in the wake of government expenditure during the pandemic.”
While the outlook is generally gloomy and uncertain, potential bright spots include the easing of inflationary pressures and the possibility for consumer sentiment to stabilize and improve. While the cost-of-living crisis still looms large and will affect many individuals, 68% of those surveyed for the report said it will ease in severity over 2023.
“On food costs there is a notable divergence in the expected impact between high- and low-income countries,” the report said. Soaring food costs will disproportionately affect low-income countries, with many more people facing food insecurity.
DISCOVER
What is the World Economic Forum doing on trade facilitation?

The Global Alliance for Trade Facilitation is a collaboration of international organisations, governments and businesses led by the Center for International Private Enterprise, the International Chamber of Commerce and the World Economic Forum, in cooperation with Gesellschaft für Internationale Zusammenarbeit.
It aims to help governments in developing and least developed countries implement the World Trade Organization’s Trade Facilitation Agreement by bringing together governments and businesses to identify opportunities to address delays and unnecessary red-tape at borders.

For example, in Colombia, the Alliance worked with the National Food and Drug Surveillance Institute and business to introduce a risk management system that can facilitate trade while protecting public health, cutting the average rate of physical inspections of food and beverages by 30% and delivering $8.8 million in savings for importers in the first 18 months of operation.

Business challenges

Weak global demand was seen as the biggest challenge for businesses to overcome in 2023, followed by the high cost of borrowing, high input costs and talent shortages.
Geopolitical trends continue to dominate thinking, being cited as the top factor shaping global economic activity in the year ahead.
Chief economists were clear on the impact of geopolitical fault lines. Image: World Economic Forum
“This wider economic impact channels through trade, investment, labour and technology flows, creating myriad challenges and opportunities for business,” the report said. “At the other end of the spectrum, the fall of the cryptocurrency sector is expected to have relatively little spillover into wider financial markets and the majority of chief economists do not expect further economic disruption from COVID-19.”

We will see significant regional variations in the inflation outlook for 2023, however, according to the latest survey of chief economists for the Chief Economists' Outlook. Although 'very high' inflation is not forecast anywhere, 57% of respondents shared high inflation expectations for Europe, while just 5% of respondents foresee the same fate for China. Year-on-year, the proportion of respondents expecting high inflation in Europe increased from 47% to 57% since September 2022, while for the US it fell sharply from 43% to 24%.

What's the price of reaching the 2% inflation target?

Erik R. Peterson, Partner and Managing Director, Global Business Policy Council at Kearney has a relatively optimistic response to this question. "Traditional economic theory holds that inflation is actually a good thing when appropriately contained and that 'killing' it would be less economic than merely 'wounding' it by bringing it down to a manageable level," he says.
"To be sure, it is critical for central banks to arrest the current high rates of inflation, but the prospects are that price pressures (accelerated by aggressive tightening by central banks) will dissipate significantly this year. Policymakers are well aware that the trade-off in addressing inflation is foregone growth and perhaps even recession in the short term, and the optimal outcome would be a 'soft' landing."
Fernando Honorato Barbosa, Chief Economist of Banco Bradesco, foresees a mild recession on the horizon, as a result of inflationary easing. He explains: "The pandemic was one of those life-threatening events that we hope not to relive anytime soon. Central banks and policymakers had to respond to it despite the low visibility. It was like landing a big jet having no radar and under absolutely hostile and unknown weather conditions. Nevertheless, they successfully landed it. With the benefit of hindsight, however, the fiscal and monetary expansions were excessive, producing the largest inflation and supply shortage in 40 years in most developed economies.