The global economy will slow to around 1.6% this year, less than half the expected long-term average of 3.5%, and inflation will fall but exceed the 2023 target in almost all countries, according to PwC’s Global Economic Watch 2023 report.

“The overlapping crises of recent years have created an extremely uncertain climate in which forecasts have become extremely volatile, with associated risks and implications for business and economic policy decisions. The global economy has slowed significantly and many countries will continue to suffer greatly from high inflation and the resulting pressure on the cost of living in 2023. However, there is reason for moderate optimism, mainly due to the fact that European countries have adapted better than initially thought to the energy crisis and to the tighter financial conditions imposed by central banks to calm inflation. Fears of a recession in the euro zone, which were predicted last year, were fortunately belied by Eurostat data released at the end of January. So there is every chance that the development will be better than forecast and the economy will continue to grow, much more slowly, but still grow,” said Dinu Bumbecea, managing partner of PwC in Romania.

Inflation will decline sharply, but will remain above target

A combination of tighter monetary policy, slowing global demand and normalizing demand patterns for goods and services should put pressure on commodity prices in 2023. Instead, services may take longer to see price reductions. While inflation will decline in most economies, it will remain above target in 2023 in almost all countries that experienced high inflation in 2022.

The economy is adjusting to higher interest rates

Consumers, businesses and governments in most G20 countries are adapting to tighter financial conditions:

Labor markets in advanced economies will remain strong but moderate, with job vacancies shrinking significantly and unemployment even rising in some countries. For example, in the member states of the Organization for Economic Co-operation and Development (OECD), approximately three million jobs will be created, compared to 20 million in the previous year.

Companies will feel the pressure of high interest rates, energy costs and slow economic growth due to falling profit margins and a growing wave of bankruptcies. Highly leveraged sectors sensitive to interest rates and energy prices will be more exposed to risk, including real estate and construction, as well as cyclical sectors such as consumer discretionary.

Governments will focus on pro-growth policies, raising tax revenues in the face of rising interest costs on their debt, while devising more innovative ways to redistribute income among the vulnerable, especially those hit by high inflation last year.

The competition between the world’s largest economies and the pressure to create sustainable economies will mean entering a new phase of globalization, which we call “deceleration“. This can mean a combination of moving (re-attachment) production in certain sectors of the economy (for example, semiconductors and other sectors considered strategic or sensitive) and the proximity of supply chains (support of friends) between countries with similar economic, political and institutional systems. To facilitate this transition, we expect greater government intervention to support certain segments of the economy (e.g. through direct and indirect subsidies, relaxation of state aid rules, etc.).

In most countries, house prices will fall or stay the same

PwC’s analysis shows that the states most exposed to housing market risks — the growth rate of mortgage interest rates, the level of household debt, the size and duration of fixed-rate mortgages — saw sharp, double-digit percentage declines in home prices. , reversing much of the price increase recorded during the pandemic.

The price of crude oil will reach a minimum of about 80 dollars per barrel

Russia’s invasion of Ukraine sent Brent crude prices above $100 a barrel for the first time in a decade, but they have since fallen and could stabilize at an average of $80 a barrel in 2023.

A year of political predictability?

2023 will be the first year this century without major elections for 85% of the world’s population, assuming there are no snap elections. This is somewhat surprising since the theory suggests that economic turbulence leads to greater political change. However, PwC’s analysis suggests that political leaders will focus on economic recovery rather than changing governments.

Article supported by PwC Romania