A man stands in front of the Bank of England in London. Europe’s economies face strong headwinds in the months ahead. (Photo: AP)

The global economy is slowing, but seems poised to avoid recession

Business surveys released on Wednesday pointed to a decline in output in Europe’s largest economies in November, bolstering expectations that high energy prices will push them into contraction in the final quarter of this year and from the first quarter to the next.

Some economists believe it is possible that the US economy will also suffer two consecutive quarters of contraction in the first half of next year in response to the Federal Reserve’s rapid monetary policy tightening, although this is far from the truth. certain.

But even with a weak start to 2023 expected in many of the world’s wealthiest countries, economists are hesitant to predict a global recession, which is commonly defined as an annual output growth rate that falls below the growth rate of the population – currently around 1%.

In concrete terms, this means that the deterioration in economic conditions that many countries, businesses and consumers around the world have experienced this year is likely to continue into next year – with strong regional variations – but the decline may not be as severe as few feared him. a few months ago, and it could bottom out later this year.

“While we don’t formally forecast a global recession from a narrow technical perspective, it will feel one for large parts of the global economy,” said Marcelo Carvalho, global head of economics at BNP Paribas.

With China set to rebound from an unusually weak 2022, many forecasters see global production rising by around 2% next year, a sharp deceleration from this year and well below its average of 3.3. % in the decade before the onset of Covid-19. pandemic, but still producing a slight increase in production per person.

European economies will face the strongest headwinds in the coming months, following Moscow’s decision to limit natural gas supplies to undermine Western support for Kyiv. Russian natural gas giant Gazprom PJSC threatened on Tuesday to further throttle exports to Europe via Ukraine from next week, calling into question one of the last remaining routes for Russian gas to reach Russia. Europe.

The economic cost of rising energy prices was laid bare in surveys of European corporate purchasing managers, which recorded another month of falling activity in November. S&P Global said its composite production index for the euro zone, which includes services and manufacturing activity, rose to 47.8 in November from 47.3 in October, remaining below the 50 mark that distinguishes a contraction of an expansion.

“A recession seems likely, although the latest data raises hopes that the magnitude of the downturn may not be as severe as previously feared,” said Chris Williamson, chief economist at S&P Global.

In the short term, Europe looks likely to avoid the worst outcomes that policymakers feared as they braced for a surge in energy demand over the winter months. A mild October and high levels of gas storage make European factories less likely to face energy rationing. As a result, Barclays economists expect their worst-case scenario of a 5% drop in gross domestic product to be averted, but continue to see a 1.3% fall as likely.

European governments acted quickly to help households and businesses facing higher energy costs, which helped support a modest rebound in consumer confidence from record highs in September. And with natural gas prices falling from August highs, some manufacturers have added back previously reduced production, including fertilizer maker Yara International ASA.

However, going through this winter without rationing will not mark the end of Europe’s energy problems. Natural gas reserves for the winter of 2023 will likely need to be replenished with supplies from Russia even lower than this year, and with greater competition for liquefied natural gas from a faster-growing Chinese economy.

Energy prices are also expected to remain high through next year and beyond, making it difficult for some factories to cover their costs. According to a survey of members of the European Industry Roundtable by the Conference Board also published on Wednesday, 15% of the group’s largest industrialists plan to permanently end certain productions on the continent.

As we approach 2023, the outlook for European economies remains optimistic, even if the worst has not happened. This is especially true of Eastern European countries that border or are close to Russia.

“I don’t think we see any improvement,” said Beata Javorcik, chief economist at the European Bank for Reconstruction and Development. “I don’t think we see a lot of green shoots.”

The biggest uncertainty facing the US economy is how much the Fed will need to raise rates in order to reduce stubbornly high inflation.

The outlook for China’s economy is also highly uncertain as the government eases some of the restrictions associated with its zero Covid policy and weak growth this year. Economists see a gradual easing of lockdowns affecting major industrial centers as key to an expected rebound in growth next year, but a recent spike in infections has raised questions about how quickly that may unfold.

“This focus of its Covid-19 policy is now being tested as cases continue to rise, particularly at its manufacturing hub in Guangzhou,” said Magdalene Teo, head of fixed income research in Asia for Julius Baer. “China realizes that reopening this winter will not be easy.”

As in Europe, economists are warning that the economy is more likely to slow more sharply than expected than to expand more sharply, bringing the world closer to recession.

“The risks of things going wrong increase from what they were in recent months,” said Alvaro Pereira, acting chief economist at the Organization for Economic Co-operation and Development.

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