Five things you need to know about the world economy in 2023

Growth will feel different and the old measures of wealth, notably GDP per head, will have to be re-thought, writes Hamish McRae

The big picture is that we are having one of those global downturns that come along very roughly every 10 years (Getty)

So what should we expect from 2023 – and beyond? The end of the year always sets economists and market analysts off on projections for the 12 months ahead… and they are usually wrong.

Last year saw a particularly hopeless set of forecasts, with the official forecasts of inflation far too optimistic, and hardly anyone predicting the collapse of the prices of US high-tech shares. Even the better forecasts have not been much help to investors. Take the one from Morgan Stanley, which did predict a surge in inflation and interest rates, thought that the benchmark S&P500 index would be “rangebound and volatile”. Well, it has been volatile, but not rangebound, for it is currently down nearly 20 per cent on the year.

So rather than trying to predict what might happen in the coming year, let’s step back and think of the wider features of the world economy right now. Here are five propositions.

First, there is a global economic cycle and this year sees the downswing of that cycle. We all know this, and while there is a debate as to which countries will come through it in better shape than the others, the big picture is one of recession. Current conventional predictions are that the US will pull out all right, the UK will have a long and difficult recession, and that continental Europe will be somewhere in between.

That may or may not be right, but the big picture is that we are having one of those global downturns that come along very roughly every 10 years: the mid-1970s, early-1980s, early-1990s, early-2000s and after the 2008 banking crash. This is not the end of the world, but it will be a tough time. We do know, however, that there will be a recovery.

Second, we have had a decade of very cheap money, with near-zero interest rates – actually below zero in Europe. That helped jack up the world economy after 2008-09, but it has now helped fuel the worst inflation since the 1980s. So that experiment is over. Never again in our lifetimes will we have such low rates and we may face several years where they are above the rate of inflation.

Third, inflation will come down. It will come down because it has to. It is wildly unpopular, sets groups of people against other groups, helps the sophisticated investors vis-a-vis the less sophisticated, and it is plain unfair. We know how to get it down, because we have the experience of doing just that in the 1980s, so the challenge will be to get it down without serious economic damage and social disruption.

Fourth, growth will resume and it will be driven, as it always has been, by advances in technology. We have learnt from the pandemic how to do things in simpler ways (how many of us used Zoom three years ago?) and those lessons will help drive efficiencies. But that future growth has to happen while at the same time placing a smaller burden on the resources of our planet – and that is a huge task.

So growth will feel different, and the old measures of wealth, notably GDP per head, will have to be re-thought in the light of changing economic structures.

Finally, the great overriding trends in global economics, notably the rise of China and India and the relative decline of Europe and Japan, will continue irrespective of the points above. There is a good long-range study of these trends just published by the Centre for Economics and Business Research (CEBR).

Some of the highlights will be familiar. China passes the US to become the world’s largest economy, though thanks to the botched response to Covid and trade tensions between China and the West, CEBR has pushed that date forwards to 2036. Indeed it argues that were China to invade Taiwan, the damage to the Chinese economy from sanctions and other action might mean that it would never pass the US in size.

The report also calculates that India passed the UK in size in 2021, will pass Germany in 2026, and overtake Japan to become the world’s third-largest economy in 2032.

Less familiar will be the outlook for some of the other big and fast-growing emerging economies, notably Indonesia, Vietnam, Bangladesh and the Philippines, all of which shoot up the league table.

As for the UK and Europe, whereas the CEBR previously thought that despite the handicaps from Brexit, the UK would outpace most of continental Europe, now – as a result of the increases in taxation proposed over the next few years – it thinks its position will not change much. But I feel what the UK and Europe do is really not important in the wider scheme of things. What matters is the message from the five points above.

This is my final column for this year but also my final one for The Independent. I will carry on my regular weekly columns in other newspapers, and meanwhile wish good fortune to my colleagues and especially to our loyal readers.