The global economy experienced a tough year in 2022. It was a world-shocking one in terms of geopolitical and economic events. The world’s main movers saw their economy struggling heavily and falling after the occurrence of several developments. Economic activity witnessed a broad-based and sharp slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, and most importantly, Russia’s invasion of Ukraine all weigh heavily on the outlook. Soaring oil prices due to supply disruptions, aggravation of the Chinese Zero Covid policy and, most notably, peak inflation which forced central banks all over the world to adopt a steep hiking cycle. However, recovery endured but the road was bumpy as price pressures proved to be sticky in 2022.
As such, IMF projected that global growth for this year will bottom out at 2.8% before rising modestly to 3% next year. Global inflation would fall, though more slowly than initially anticipated, from 8.7% last year to 7% this year and 4.9% in 2024. Inflation, in its turn, is still high despite recent softening driven by lower prices of food and energy but core inflation has not yet peaked in many countries. IMF expects that Inflation’s return to target is unlikely before 2025 in most cases.
The economic slowdown was mainly concentrated in advanced economies, in particular, Euro zone and the UK. Growth in these two areas fell and it is expected to fall further by next year to 0.8% before recovering to 1.4% and 1%, respectively. In contrast, several emerging market and developing economies would rebound with growth accelerating from 2.8% in 2022 to 4.5% in 2023. The labor market remained very strong and showed signs of resilience in most advanced economies. Suggested stronger than expected demand, hence output and inflation estimates pushed stronger than expected aggregate demand. This forced policymakers to tighten further and to stay tighter for longer than was projected.
Lastly, impacts from the sharp and fast rise in interest rates are becoming apparent as financial sector vulnerabilities are at the front line in advanced economies and fear of contagion has risen across the broader financial sector. Furthermore, public debt as a ratio to GDP soared across the world and is anticipated to remain elevated, posing a mounting challenge for policymakers. Consequently, risks to the outlook are severely twisted to the downside, with the chance for a hard landing.
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