The year 2023 has arrived, and many economists and analysts are closely watching the global economic landscape to determine what the future might hold. After a challenging year in 2022 with the war in Ukraine and its impact on economies, many are eager to see what 2023 will bring. In this blog post, we’ll take a look at some of the key factors that are shaping the economic outlook for this year.

Inflation

One of the main concerns for many economists in 2023 is inflation. Inflation refers to the increase in the cost of living as the price of goods and services rise. Over the past year, inflation rose due to the increase in spending associated with the end of the last lockdown. The cost of energy, which shot up due to the war in Ukraine, has also been one of the key drivers of inflation in the UK. This can all be seen in the chart below:

On the bright side, economists expect inflation to fall quickly this year. Despite the energy cap lift this April, the price of energy is not expected to rise so rapidly and oil and gas prices have fallen a lot recently. Higher interest rates (4%) will help to reduce the demand for goods and services in the economy – this will help slow the rate of inflation down further.

Some economists, including the Bank of England, predict that we could see inflation rates fall to the 2-3% range by 2024, which would still be a significant increase from the low inflation rates seen pre-Covid. However, we are yet to see what impact the wage rises for workers on strike have on the economy.

GDP

Economic activity significantly decreased towards the end of 2022 as consumers limited their spending in response to soaring living costs. Business investment also fell due to concerns over the strength of the UK and global economy.

The IMF expects the UK economy to shrink by 0.6% in 2023. This forecast makes the UK the only G7 economy to have negative growth in 2023. The UK is also the only G7 country with GDP below its pre-pandemic level. 

Although energy prices are falling, they account for a large proportion of household expenditure and it is expected to weigh on economic activity. Higher borrowing costs for businesses and households after the recent bank rate increase will also play a role.

Employment

In November unemployment was 3.7% (ONS) – the lowest level seen since the 1970s. This is largely due to rising economic inactivity because of a rise in early retirement during the pandemic and rates of long-term sickness. Brexit is also to blame for this issue, as a large pool 

The rise in inactivity means the UK is on track to be the only advanced economy with employment still lower than pre-Covid levels at the start of 2023. The UK is also still experiencing labour shortages largely because of Brexit. Employers have responded by offering incentives like higher wages, however, pay growth remains below inflation, meaning real-terms pay cuts for most people.

The economic slowdown we are currently experiencing will most likely drive up unemployment, as weaker levels of spending from consumers and businesses, alongside higher costs, lead employers to reduce labour costs.

Growth in emerging markets

The trend of growth and expansion is expected to continue for emerging markets, in 2023. Growth in emerging markets is expected to rise to 4% and 4.2% this year and next. Together, China and India will account for half of global growth this year, versus just a tenth for the US and euro area combined.

The restrictions and COVID-19 outbreaks in China hampered activity last year. Now that the economy is reopened, we expect to see growth rising to 5.2% this year as activity recovers.

Outlook

The economic outlook for 2023 is uncertain, but there are several key factors that will shape the future. From concerns about inflation to the impact of labour shortages, there are many challenges facing the global economy. However, there are also many positive factors that suggest that the global economy will continue to grow and recover. With the right policies and support, 2023 could be a year of economic growth and stability.

Footnotes:

1.https://www.imf.org/en/Blogs/Articles/2023/01/30/global-economy-to-slow-further-amid-signs-of-resilience-and-china-re-opening

2.https://www.theguardian.com/business/2022/dec/29/five-charts-that-show-the-uks-economic-prospects-in-2023

3.https://www.bbc.co.uk/news/business-64452995

4.https://www.statista.com/statistics/279990/unemployment-rate-in-the-uk-by-country/

5.https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/february-2023#:~:text=The%20Bank%20of%20England’s%20Monetary,percentage%20points%2C%20to%204%25.