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ECONOMY| 12.01.2023

Threats to the global economy in 2023

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2023 presents new risks for the economy that could trigger an event similar to a recession shock. An update to the MAPFRE Economics Outlook report adds two new risks to global stability: the vulnerability of the real estate and energy markets. Along with six other problems, these risks may cause global growth rates to drop to under 1% if they get worse.

Real estate markets are facing a more vulnerable situation due to rate hikes and falling demand. On the supply side, inventory remains at historically low levels. However, “the accumulated overvaluation since the outbreak of the pandemic in certain markets like Canada, the United Kingdom, and the United States has added to the risk of price correction,” according to the report. Though the process is expected to be gradual, it could possibly take a turn for the worse due to a weak labor market and compliance with strict monetary policies.

As for energy markets, analysts expect that prices will remain high for an extended period of time, and that reduced demand will be offset by supply shortages. Energy prices have eased in the last few months, but as long as the war in Ukraine keeps going on, the geopolitical landscape will remain volatile and unfavorable. “In addition, global inventories are at historically low levels, and in the short term it will still be impossible to replace gas and oil with other renewable energy sources,” added the experts at MAPFRE Economic Research.

Another major risk is global debt sustainability. In the third quarter of 2022, developed countries recorded a fall in GDP of three percentage points. But, in the case of emerging economies, GDP rose by two points. Gonzalo de Cadenas-Santiago, Director of Macroeconomics and Financial Analysis at MAPFRE Economics, expects that the figure will go up this year. Furthermore, currency depreciation against the dollar poses an additional challenge to these economies, with the short-term alternative of focusing on restructuring maturity profiles. As for developing countries, they are facing growth in the context of persistent countercyclical policies and a macroeconomic climate with ill effects on the ratio.

A much more severe economic downturn than anticipated is another growing risk for 2023, as a result of the overreaction central banks have had to inflation, which also remains one of this year’s main threats. The experts at MAPFRE Economics aren’t ruling out second-round effects and “a more restrictive monetary reaction and its resulting impact to control aggregate demand.”

One risk that has been put on the backburner, however, is the sovereign-debt crisis in China. The anticipated easing of Covid-19 restrictions in China will strengthen the Asian economy’s performance potential, led by a foreseeable rise in consumption (both due to more consumer trust and savings accumulated over the prolonged period of restrictions) and a possible reinvigoration of manufacturing and service sectors, which will help alleviate the accumulated decline in exports that the Chinese economy has faced in the last few quarters. In turn, the Chinese central bank’s flexible monetary policy focused on growth, in combination with a more proactive fiscal policy, could provide a further catalyst and engine of endogenous growth for this country.

Elsewhere, there are also a series of conflicts putting geopolitical stability at risk. At the global level, it seems unlikely that trade relations between Russia and member states of NATO will be re-established anytime soon. On the contrary, a new round of sanctions may be introduced, which, even if only partially applied, could have negative effects on the rest of the economies. At the regional level, Europe is dealing with fiscal discipline in addition to the ECB ending purchasing, all within the context of declining growth. Markets are scrutinizing Latin America’s public finances amid fears of an unbalanced fiscal policy, and the upcoming presidential election in the United States will make it difficult to come to an agreement on new transatlantic cooperation measures.

Climate risk is still on the horizon as well. The agreements reached at the 27th United Nations Climate Change Conference (COP27) were once again limited, as they focused on setting up a fund to help pay for losses and damages caused by the climate crisis, while leaving aside more aggressive measures that would speed up the transition to a zero-carbon world.