High inflation, low growth to stifle economy in 2023 – report

Economic growth in the eurozone and the US will be weak in 2023, according to Munich Re’s Economic Outlook 2023. While inflation is falling in many industrialised nations, it will remain higher than previous levels in the medium term, according to the report. Inflation will overshoot the targets of the world’s major central banks until at least next year.

However, the negative macroeconomic impacts of high inflation on household incomes will be eased by relatively stable labour markets and solid employment, Munich Re predicted.

Global economic growth is expected to be relatively low this year, according to the report. However, both the general mood and published economic data have seen some improvement in recent weeks.

Danger of stagflation

High inflation and falling real incomes are putting a significant strain on demand for consumer goods, especially in industrialised nations. Additionally, the strong recovery in consumption seen following 2020’s COVID-induced recession is now grinding to a halt.

Munich Re predicted that Europe and the US would likely experience stagflation – almost no economic growth combined with high inflation. However, relatively robust labour markets should prevent the economy from sliding into recession, the report predicted. Real growth in the US and the eurozone is predicted to rise to above 1% next year.

With growth at a standstill in Europe and the US, global economic growth this year will be driven almost exclusively by emerging markets, with China resuming its role as a growth engine, Munich Re predicted. However, the impacts of an intense COVID-19 wave and problems in the real estate market continue to stifle economic development in China. While growth is expected to improve somewhat compared to 2022’s level of 3%, the 4%-5% growth predicted is still far below growth rates seen in the past.

Geopolitical tensions

The Russian invasion of Ukraine in 2022 spurred fears that the supply of natural gas in Europe could be restricted and a severe recession could be in the offing. Those fears have proved unfounded so far, Munich Re reported. However, the effects of last year’s record energy prices will continue to impact growth and inflation rates this year, especially in Europe.

In addition to the war in Ukraine, increased tensions in the Middle East and between US and China also pose significant geopolitical risks, Munich Re said.

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