Stagflation light


Crédito y Caución (Atradius) | The global economy is facing an unprecedented mix of challenges which are bringing it to the brink of recession in 2023. Stubborn inflation is the most dire challenge, which has far-reaching knock-on effects across the entire economy. We now find ourselves in a much-feared ‘stagflation’ reality – one characterised by low GDP but high price growth. Central banks have undertaken an aggressive tightening path to help prevent entrenchment of high prices and low growth. While this comes at a cost to global demand, it may just be enough to ensure ‘stagflation- light’.

Key points

Global GDP growth is forecast to slow sharply to 1.2% in 2023 from 2.9% in 2022 as stagflation kicks in. The slowdown is broad based, primarily driven by the cost-of-living crisis in advanced economies, tightening financial conditions, the ongoing Russian war in Ukraine and lingering effects from the pandemic. The downturn should be relatively short-livedthough, as the contraction in demand will allow prices to cool off through the year.

We expect global CPI inflation has now reached its peak and that disinflation will pick up through 2023, bringing the average rate down to 5.3% from 7.9% in 2022. Rapidly tightening monetary conditions are easing demand-side pressures as supply chain bottlenecks subside. The energy and food components will remain volatile as long as the war in Ukraine rages on, but base effects ensure a downward inflationary trajectory.

Global trade growth is quickly falling back to levels closer to world GDP growth as the pandemic effects fade and globaldemand falters. With sentiment indicators deep in contractionary territory, we now forecast trade to grow only 3% in 2022 and 1.5% in 2023.

Advanced economies as a whole will see their growth come to a standstill in 2023 as high inflation and tighter financing conditions constrain consumer purchasing power. The situation for European economies that are more dependent on energy imports from Russia is especially subject to downside risk.

GDP growth in emerging market economies (EMEs) is forecast to decelerate to 2.9% in 2023 from 3.6% in 2022. EMEs in general have already been dealing with tighter domestic financing conditions and spill-overs from Russia’s invasion of Ukraine, especially through prices. These will continue to drag on growth in 2023 as global demand weakens and the higher interest rate environment threatens debt sustainability.

As the global economy teeters on the edge of recession in H1 of 2023, dragged down by advanced economies, we see persisting inflation to be the main risk. Should further energy price shocks occur in addition to a vicious wage-price spiral in advanced economies, and monetary policymakers fail to rein in price growth, this would lead to a deeper globalrecession with even higher prices further choking off growth. We call this scenario ‘stagflation-strong’ and expect that it would halve global GDP growth to 0.6% in 2023.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.