Inflation and supply chain fears easing, but global economy continues to face uncertainty

• Sharp falls in inflation to leave behind some of the recent challenges for the global economy.

• Central banks approaching the end of the tightening cycle partly as a response to recent tensions in the banking system.

• Easing supply chain pressures and resilient labour markets to support recovery but uncertainty about the outlook remains high.

• KPMG forecasts world GDP growth of 2.1 percent and inflation at 5.3 percent for 2023

The outlook for the global economy took a positive turn in the first half of 2023 as inflationary pressures began to ease, but ongoing geopolitical tensions and domestic challenges in key markets are slowing any return to sustained growth, according to the latest forecast from KPMG.

According to KPMG's latest Global Economic Outlook report, global energy prices returning to levels last seen prior to the invasion of Ukraine, combined with easing commodity and food prices, have helped put further downward pressure on inflation for the rest of 2023.

Despite the positive news, major economies throughout the world – most recently the UK and USA – are facing their own domestic pressures, delaying any hopes of improving market conditions and a drop in inflation. The nuanced, complex picture in each country, region and territory is placing unprecedented pressure on central banks, with worries that core inflation could remain sticky and price rises could become entrenched due to the relatively tight economic environment facing a number of territories. Growing fears for the wider international banking system could further complicate matters for central banks as they weigh in financial stability risks against a plan to bring inflation back to target.

The global organisation is forecasting GDP growth of 2.1 percent in 2023 and 2.6 percent in 2024 with inflation forecast at 5.3 percent in 2023 and 3.2 percent in 2024, and global unemployment levels of 5.2 percent in 2023 and 5.4 percent in 2024.

Yael Selfin, Chief Economist at KPMG in the UK, said:

"Despite the resilience of the labour market and the improving inflation conditions, we expect global economic growth to be relatively modest over the next two years, and to stay below its long-term average. Global growth is expected to be driven by the recovery of the Chinese economy and a relatively strong growth in some of the emerging markets, while Eurozone and the US economy are expected to contribute less to global growth over the next two years. Risks to the outlook are broadly skewed to the downside given the volatility in financial markets.

"The global economy has been through a series of significant shocks over the past three years – the Covid-19 pandemic and the Russia-Ukraine conflict – and saw a major expansion to government debt and a significant hike in policy interest rates by central banks. The ramifications of some of these headwinds may not have surfaced yet and we are still to see their full impact and how they interact."

With monetary policy focused on moderating inflation while stabilising financial markets, fiscal policy is left as the potential tool to boost economic growth. Unfortunately, the public finances have deteriorated significantly over the past three years. Governments have spent significant amounts on first shielding their economies from Covid-19 and subsequently on protecting households and businesses from higher energy prices. That left public debt at historically elevated levels, with less room for expansionary fiscal policy. Even in the U.S., federal spending is expected to slow despite the ramp up in infrastructure spending, although in China fiscal support is to be stepped up following the reopening of the economy. The rise in interest rates has made these larger debt levels more costly to service, putting further pressure on government finances. Nevertheless, some positive growth momentum is expected this year from the relatively smooth reopening of the Chinese economy following the lifting of Covid-related restrictions in December last year.

The pressure on global supply chains has eased significantly in recent months, while shipping costs have dropped too. This should help alleviate some inflationary pressures and improve supply capacity. Global trade remains relatively weak, although we would expect it to recover this year as trade flows normalise with the reopening of the Chinese economy and a recovery in global growth, while we expect geopolitical tensions to continue to exert some pressure on trade flows over the medium term. Consumer demand is also expected to pick up this year, with excess savings – money saved during the pandemic when spending on certain services was not possible – still relatively high in China and Europe, which could potentially be deployed once confidence returns. Indeed, consumer confidence has started to improve in Europe, although it remains at relatively low levels.

Paul Kent, Partner, Advisory, at KPMG in Singapore, said:

"Singapore stands out as a beacon of hope amid global economic uncertainties. Even as the world faces challenges such as geopolitical tensions and banking crises, Singapore continues to experience steady growth in its economy that is expected to remain notably higher compared with other regions – thanks to strong optimism in the ASEAN region and sustained international investment in the nation. Furthermore, unemployment levels remain low and are expected not to rise significantly this year, highlighting Singapore's relative resilience in the labour market.

"To ensure that Singapore remains vibrant and competitive economically, businesses across sectors need to focus their efforts on increasing productivity and upskilling their workforce to weather any potential turbulence ahead. Moreover, Singapore must also continue to keep a close pulse on the implications of global developments on inflation and interest rates to ensure that households and businesses remain sufficiently cushioned from the rising costs.

"The good news is that Singapore has in place robust and sound controls to safeguard its financial systems, with overall limited risk and exposure to banks here so far. However, the country will have to tread cautiously amid heightened volatility in the global financial markets and be ready to respond decisively to any 'black swan' events that could destabilise the economy."

Regina Mayor, Global Head of Clients & Markets at KPMG, commented:

"How we get back to sustainable, long-term growth is the big question facing boardrooms and political chambers around the world right now. Some of the biggest inflationary fears – widely predicted late last year – have been mitigated by more direct, pro-active political action geared especially towards getting rising energy prices down. There are also signs that other commodities and food prices are finally starting to ease – helping consumers and business owners who've been facing a significant financial squeeze.

"The actions taken over the coming months are likely to play a significant role in the pace and nature of the world's economic recovery. KPMG's forecasts show that employment levels should remain robust, even given recent tech layoff announcements – a sign that the tightness of the labour market faced post-pandemic shows little sign of easing. It's an indication of the complexities the world faces today. Strong employment figures are often held up as an example of buoyant market conditions, but they can also reflect the challenges central banks are facing as they attempt to juggle wage expectations, tightened credit conditions and the ever-present danger that any shift in the conflict in Ukraine could bring inflation back into the mix. The upside of a strong labour market, combined with relatively strong personal savings among consumers – especially in Europe and the Americas – means we could start to see robust consumer spending, driving a return to slow-but-steady domestic growth in key markets."

Download KPMG's Global Economic Outlook H1 2023 report at this link.

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