The Q4 Global Economic Conditions Survey (GECS) shows signs of steadying, however, many indicators remain weaker than a year ago. The good news is that the GECS Confidence Index bounced slightly for the second consecutive quarter, perhaps reflecting hopes that the worst of the central bank tightening might soon be over and that China might successfully relax its zero-COVID restrictions.
Even so, the Confidence Index remains below its median reading for the period since 2012. There is not much positive news from the other three economic indicators – new orders, capital expenditure (CapEx), and employment. CapEx picked up marginally but remains below the median of the same period; new orders and employment showed a further modest deterioration.
Taken as a whole, the results are consistent with a subdued macro-economic outlook. But the good news is that they do not appear yet to be at levels consistent with an outright global recession in 2023 – even though this is the base case scenario for many economic forecasters.
A good cross-check is provided by the two GECS “Fear” indices, which reflect respondents’ concerns that customers and/or suppliers may go out of business. Reassuringly, these were little changed from the 2022 Q3 survey, despite the sharp rise in borrowing costs and the prospect of negative corporate-earnings growth in 2023.
Assad Hameed Khan, head of ACCA Pakistan, said: “What stands out is the improvement in confidence in developed countries – both Western Europe and North America. The improvement in confidence probably reflects hopes that the Russia–Ukraine situation can be contained, and that there will be sufficient natural gas to see Europe through what now looks increasingly likely to be a mild winter. Looking to the weaker emerging markets (especially Pakistan) however, 2023 could still prove to be a challenging time as reflected in the growing sovereign credit concerns and request to International Monetary Fund (IMF) for assistance. Moreover, the central bank remains under pressure for continued higher interest rates, monetary tightening and foreign exchange transaction restrictions (further slowing growth).”
Loreal Jiles, vice president of research and thought leadership at IMA, said: “Global confidence has edged up for the second consecutive quarter as cost concerns have eased and with worries about accessing finance and securing prompt payment having not gotten any worse.
“This is something of a surprise given the global rapid tightening of monetary policy by the world’s central banks. The past 12 months have seen the most aggressive tightening of policy in more than 40 years, in pace, scale and breadth. It is strange that this has not yet had a material impact on financing conditions and corporate cash flows. But monetary policy works with long and variable lags, which suggests that this may become more of a problem later in 2023.”
The global economy faces three major uncertainties.
First, have central banks overdone or underdone the amount of tightening that they have imposed?
Second, can China engineer a smooth exit from zero-COVID without additional lockdowns?
And third, will wage pressures ease without a major weakening of the employment market?
One of the unresolved questions from the COVID crisis is whether the combination of early retirement, prolonged ill health, and the move to hybrid working has profoundly altered the balance of power between employers and employees. These changed employment-market dynamics may make it harder for central banks to bring core inflation back to their 2% targets.
The answer to each of these questions will become much clearer as 2023 progresses.
