With excessive post-COVID consumer demand and the battle against inflation continuing to weigh on growth in 2023, global GDP growth will top out at just 2.2%, narrowly defying recession, but lower than the estimated 3% growth expected for 2022.
Inflation, economic contraction, higher interest rates and higher energy prices are expected to see consumers curtailing their discretionary spending, including travel. The early part of 2023 is expected to be softer than the demand trend experienced in the latter half of 2022. The extent of the slowdown may well be determined by the impact of energy costs and the severity of the winter months. The summer months could shape up well as research suggests that consumers are firmly committed to resuming travel and may prioritise discretionary spending on holidays.
Euro Zone – A challenging year ahead
Real GDP growth is forecast to grow by just 0.3% in 2023 on the back of the ongoing energy crisis and tightening monetary policy. GDP growth in 2024 is forecast to resume with a consensus estimate of 1.4%.
Of the three biggest EU economies, Germany is forecast to return the third worst-performance within the G20 countries (-0.3%), while Italy (0.2%) and France (0.6%) are likely to post modest growth, according to the OECD.
Inflation: Headline inflation dropped for the second consecutive month to 9.2% year-on-year in December to 9.2%, down from 10.1% in November and the October peak at 10.6%. Energy continued to represent the biggest driver, but down from 34.9% in November to 25.7% in December, as natural gas price continues to decline from its peak in August, according to the latest figures.
Interest rates: the European Central Bank, driven by inflation concerns, interest rates four times in 2022 to its current 2% level. The bank is expected to continue to raise rates, possibly to 3% by mid-year “Interest rates will still have to rise significantly at a steady pace” to ensure that they can return inflation to the 2% target in a “timely” manner, according to an ECB statement.
Unemployment: at a record 6.6% low, jobs filled and hours worked are ahead of pre-pandemic levels on the back of increased labour market participation. While there may be some weakening of employment across the euro zone, any increase in unemployment is expected to be marginal.
The euro: A combination of weak economic growth, the war in Ukraine and the tardy response of the European Bank in raising interest rates saw the euro devalue in the latter half of 2022. The decline in value was most marked against the US dollar, with the currency finishing up the year down 6%, having earlier been traded at close to parity. The euro gained marginally in value against sterling over the year.
Energy prices remains among the significant downside risks to economic recovery – the dominant component of inflation for businesses and consumers. The outlook could become more challenging in the latter part of winter into spring in the face of possible gas shortages and higher prices.
The short term outlook is likely to see high inflation and low consumer sentiment impacting private consumption. Inflation is expected to stay high due to the pass-through of energy and producer prices to consumers, the depreciation of the euro and rising wage pressures, but gradually moderate over the next two years.
Looking specifically at Germany, Europe’s largest economy, the country has a high dependency on Russian energy. Latest data showed inflation dropping from 10% in November to 8.6% in December. The economy recorded a 0.4% growth in Q3’22, slightly more than expected, leading some economists to predict the recession will not be as bad as initially feared. However, Germany’s dependence on exports, continued energy price volatility, and reduction in incomes and saving dampening private consumption, remain persistent risks to economic recovery. While the labour market remains robust amid intensifying shortages, annual negotiated pay rose only by 2.9% in the second quarter of 2022, resulting in a real wage decrease of 4.4%.
High inflation in Germany is reducing real incomes and savings, dampening private consumption. Latest data shows consumer confidence inching up after a long period of decline although still a long way off historical levels.
USA – Avoiding recession, a soft landing?
Americans expect worsening economy in 2023, as one third say inflation is causing them major strain, according to a recent WSJ poll. A ‘soft landing’ is a plausible outcome where job openings are falling while unemployment remains low, although the risk of a recession remains.
Inflation: The latest consumer price index (CPI) showed prices rising annually by 7.1% in November, a continuation of a gradual decline from a 40 year high of 9.1% in June. Forecasts suggest that inflation could fall to just 2.4% by the end of 2023.
Interest rates: The Federal Reserve continued its battle against inflation by raising its benchmark interest rate by a half percentage point to a targetted range between 4.25% and 4.5% in mid-December to a 15 year high. The combination of slowing growth and cooling inflation is likely to prompt the Fed to curb its rate hiking, possibly reaching a peak of 4.5% to 4.75% in early 2023 and held throughout the year before a steady decline in 2024.
Employment: Jobs growth has been steady in 2022 adding 4.5 million jobs, although with some shifts within sectors most sensitive to borrowing costs. Wages are 5.1% higher than a year ago, a bigger increase than expected, according to the latest data for November from the US Department of Labour. Despite the labour market cooling in December, as hirings slowed, unemployment rate has ticked down to 3.5%, back to the pre-pandemic level. However, the Fed project that unemployment could rise d in 2024 and 2025 as economic growth falters or nudges into recession.
US Dollar: The currency gained 8% on a basket of currencies over the year, the best appreciation of the dollar in seven years. The dollar hovered around parity against the euro for several weeks in November, before finishing the year at $1.068 against the euro.
The UK – on the brink of recession
The UK is grappling with twin threats of rampant inflation and weaker to negative economic growth, and is forecast to be the second weakest performer of the world’s big economies in 2023. The UK’s poor performance is the result of a combination of a 41-year-high hike in the cost of living, rising interest rates, post- pandemic and Brexit impacts, government action to bring down borrowing and debt, and the market turbulence of the September budget.
GDP: The economy is forecast to shrink in 2023 – a contraction in GDP in the last quarter 2022 would put the economy officially in recession after a 0.2% contraction in the third quarter. December saw a fifth consecutive month of contraction in UK factory output to a 31 month low, according to the S&P’s latest manufacturing purchasing managers index. The latest trend data points to a mild rather than sever recession with GDP contracting over four quarters ending in ending in the middle of 2023. Forecasters differ on the depth and length and depth of the recession with the UK’s Office for Budget Responsibility predicting a 1.4% decline in 2023. The economy is expected to return to 1% growth in 2024.
Inflation: The consumer price index rose by 10.7% in the 12 months to November 2022, down from 11.1% in October. Rising prices in the hospitality sector offset reduction in transport costs. The annual growth of UK food prices was 13.3% in December, the highest reading on record, according to new figures from the British Retail Consortium. The annual rate of inflation (CPI) is expected to fall rapidly by mid-2023, with the Bank of England forecasting a rate at around 5% by end 2023, falling to 1.4% in 2024.
Interest rates: Higher mortgage costs and credit card interest rates are a particular pressure facing millions of households, reflected in a dampening of retail sales. The Bank of England may raise interest rates to 4% in February, the 10 successive increase since December 20212.
Employment: The unemployment rate increased marginally to 3.7% in the three months to October, as vacancies fell on an annual basis not seen since early 2021. The CBI forecast unemployment to reach 5% by year end 2023. While pay rose by a stronger than expected 6.1% over the same period, according to the ONS, wages continue to lag inflation. The UK is currently experiencing widespread industrial unrest with strikes across many sectors, including health and transport.
£ Sterling: The currency declined in value over the course of 2022, down 5% against the euro. As political certainty is one of the key drivers for the performance of a currency, the expectation is that the pound will at least stabilise is not appreciate in value. Morgan Stanley, breaking ranks with many other economists, expect Sterling to strengthen in 2023.
Asia: An Optimistic Outlook
Asia’s outlook for the year ahead is relatively upbeat, with three of the world’s largest economies – China, Japan and India – driving a return to modest growth. China, following the repeal of its Covid-zero policies and full reopening of its economy, is forecast to grow by 5% in 2023, a significant improvement on the current forecast of 3.2% in 2022, although still well below annual growth over the past decade.
China is one of the few major economies expected to see growth pick up next year after a wave of COVID lockdowns. Growth is forecast to rise from 3.3% this year to 4.6% in 2023 and 4.1% in 2024.
Data sources: include OECD; EU Commission / Eurostat / ECB; US Fed Reserve; Bank of England; ONS (UK); McKinsey; Morgan Stanley; Reuters; Financial Times.
Consumer sentiment benchmarks
European Consumers’ confidence remains well below its long-term average
Consumer sentiment indictor rose marginally in December compared to November, according to the European Commission. However, the index is still in serious negative territory after a free fall of more than a year, and only marginally above the trough reached at the onset of the COVID-19 pandemic.
As European consumers contend with double digit inflation and soaring costs of living – monthly retail sales have slowed more than at any other time during the pandemic, with sales significantly down in Germany and France.
In terms of the U.S., consumer confidence has improved on the back of an expectation of a fall in inflation. While overall consumer spending is expected to decline in 2023, as excess savings are tapped out and debt rises, consumers are still expected to have enough pent up demand and resources to keep spending at a reasonable level on travel.
Meanwhile, UK consumer confidence still remains at a record low. Despite this British holidaymakers are reported to continue to prioritise travel abroad, recent polling from Skyscanner revealed.