Comment: Uncertainty shocks the new normal

This article first appeared in Wealth, The Edge Malaysia Weekly, on February 27, 2023 - March 05, 2023.
Comment: Uncertainty shocks the new normal
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Global shocks, both economic and geopolitical, have become more frequent in recent years. Amid such a volatile environment, do economic growth forecasts matter anymore? In the last one year alone, we have seen global growth forecasts being revised, upwards and downwards, multiple times, and in all likelihood, there will be more revisions in the months ahead.

Until late last year, the rhetoric on 2023’s economic outlook was centred on the growing risk of a global recession amid high inflation. The fear was that stagflation, after an absence of more than three decades, may once again be rearing its head.

Fast-forward to February and we find that sentiment has improved, based on several developments in the global economy. These include the better-than-expected growth performance in the US and the eurozone, as well as the reopening of China.

The US economy grew 2% in 2022. Subsequently, the International Monetary Fund (IMF) last month revised the US growth forecast for 2023 higher to 1.4%, from the 1% it projected last October. Growth in the eurozone was revised slightly upwards to 0.7%, from 0.5% before. 

The IMF also raised its forecast for China, putting 2023 gross domestic product (GDP) growth at 5.2%, compared to the 4.4% it predicted last October.

Based on the improving numbers and peaked inflation numbers, the threat of a global recession appears to be fading. Even so, it may be too early to rule out the global stagflation threat, given that volatility is still the name of the game. Indeed, any adverse developments in the coming months can still tip the fragile world economy into a recession. 

Recession or not, the fact of the matter is that the global economy will see weaker growth in 2023 compared to 2022. Sentiment, although improving, is still fragile. Inflation, although peaked in some countries, remains high and is proving to be stickier than expected.

The problem with stagflation, which is defined as a period of slow growth amid high inflation and rising unemployment, is the dilemma it poses for policymakers. Indeed, policy error remains one of the biggest risks for financial markets in 2023.

In a stagflation, consumers will also be hard hit. On one side, prices of goods and services are driven higher by supply constraints, thus eroding purchasing power. The double whammy is that amid weak economic growth and rising unemployment, income levels tend to remain flat, or may even fall. Consumers will have less money to spend at a time when the cost of living is rising. Which is why the poor will be the hardest hit when stagflation occurs. The rich-poor divide widens. 

The last time the global economy was rocked by stagflation was in the late 1970s and early 1980s, with inflation hitting double-digit levels, a reason being rising energy prices.

Although the threat of stagflation is receding, the global economy is still in a vulnerable state. In January, the World Bank projected that global growth will slow to 1.7% in 2023, its third-weakest pace in three decades, overshadowed only by the recession in 2009 (caused by the global financial crisis) and the 2020 Covid-19 pandemic lockdowns.

It warned that any adverse developments and shocks could push the global economy into a recession. These include a continued uptick in inflation and over-tightening of monetary policy by central banks.

The latest data showed that the US inflation remains sticky, with the rate in January coming in at 6.4%, slightly higher than the forecast 6.2%. A view is that the inflation battle isn’t over, not just in the US but worldwide. Which means that interest rates in the US will stay higher for longer. 

At the moment, though, most economists do not see a synchronised recession in the global economy. While growth in the US and the eurozone is expected to stay around 1% to 2%, emerging markets, such as those in Asia, are performing better.

In Malaysia, while GDP for 2022 grew at 8.7%, growth in 2023 will be lower. Bank Negara Malaysia has projected 2023 growth at between 4% and 5%. Inflation, meanwhile, is expected to taper slightly to between 2.5% and 3%, from 3.4% in 2022. A consensus view is that the risk to growth is on the downside and inflation, on the upside. Hence, the view is that Bank Negara will likely raise rates, by another 25 basis points, sometime this year.

The bottom line is, uncertainty shocks are a new economic reality that policymakers and investors should be prepared for.