How the World Economy Can Avoid Recession

Forecasters respond in part to real-time economic data. These were better than expected, despite talk of a global recession at least since Russia invaded Ukraine last February.Consider weekly estimates gross domestic product from this OECD, a group of mostly rich countries that account for about 60% of global output. It’s not booming, but few countries were struggling in mid-January (see Chart 1).The widely watched Purchasing Managers Index , which measures global output, rose slightly in January, matching the gross domestic product An increase of about 2%.

Official figures remain mixed. The latest data on U.S. retail sales and industry came in below expectations. Japan’s machinery orders were much weaker than expected.However, after reaching record lows in the summer, overall consumer confidence OECD It levitated.Shortly after we go to press, officials will release their first estimates for the U.S. gross domestic product In the fourth quarter of 2022. Most economists expect a decent number, although the disruption from the pandemic means the numbers will be less reliable than normal.

The labor market also appears to be holding firm. Unemployment is rising in some rich countries, including Austria and Denmark – a clear sign that a recession is coming. Almost every day another big tech company announces layoffs. However, technology accounts for only a small fraction of overall employment, and unemployment remains low in most countries. Happily, where demand for labor has fallen, employers are pulling job advertisements rather than laying off people. We estimate that since reaching an all-time high of over 30 million early last year, OECD down about 10%. Meanwhile, the number of people actually working has fallen by less than 1% from its peak.

Investors focus on the labor market, but what they really care about now is inflation. It is too early to know whether that threat has passed. In the developed world, “core” inflation, a measure of underlying stress, remains at 5-6% year-on-year, well above what central banks deem appropriate. However, the problem didn’t get any worse. In the US, core inflation is falling, as is the proportion of small firms planning to raise prices. Another measure by researchers at the Federal Reserve Bank of Cleveland, data firm Morning Consult and Raphael Schoenle of Brandeis University is a cross-country measure of public inflation expectations. It also appears to be declining (see Figure 2).

Two factors explain why the global economy is performing better than expected: energy prices and private sector financing. Fuel costs rose by more than 20% in the developed world last year, and by 60% or more in parts of Europe. Economists expect prices to remain high through 2023, overwhelming energy-intensive sectors such as heavy industry. They are wrong. Aided by unseasonably warm weather, companies have proved surprisingly flexible in dealing with high costs. German industrial gas consumption was 27% below normal in November, but industrial production was only 0.5% lower than a year earlier. Over the Christmas period, European gas prices halved to levels seen before the Russian invasion of Ukraine (see Figure 3).

The strength of private sector funding is also having an impact.Our best guess is G7 Individuals have around $3 trillion (or around 10% of annual consumption spending) in “excess” savings – i.e. more than you would expect them to accumulate in normal times, through pandemic stimulus and 2020-21 lower spending. So while corporate America’s quarterly earnings suggested spending was faltering, it wasn’t falling off a cliff. Consumers can afford higher prices and higher credit costs. Meanwhile, companies are still sitting on a lot of cash. Few face huge debt repayments right now: $600 billion of dollar-denominated corporate debt is due this year, compared with $900 billion due in 2025.

Can the data continue to exceed expectations? There is evidence, including a recent paper by bank Goldman Sachs, that the worst drag on monetary policy tightening comes about nine months later. Nine months ago, financial conditions started to really tighten. If the theory holds, the economy may soon find its footing, even if higher interest rates erode inflation. China is another reason to cheer. While the removal of domestic covid-19 restrictions in December slowed the economy, the removal of “zero covid” will eventually boost global demand for goods and services as people flee the virus.