Worldwide: KPMG Global Economic Outlook - H1 2023

• 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 labor 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 organization 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 labor 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 stabilizing 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 normalize 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.

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 labor 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 labor 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."

Tassos Yiasemides, Board Member and Head of Corporate and Global Compliance Management Services, commented:

"The global economy is called to operate in an environment that imposes a mixture of challenges with rising interest rates, signs of a slowdown, persistence of inflationary pressures despite their reduction and geostrategic confrontations.

Improved conditions in the supply chain reinforce the inflation reduction efforts at a time of structural problems in the food market and decisions to limit oil production, as a result of the new geostrategic realities. It is obvious that a new political and economic international map is already taking shape.

The individual's and businesses' savings as a result of the pandemic and the strengthening of employment, keep consumption at satisfactory levels despite the significant tightening of monetary policy.

Central banks around the world are trying to curb inflation which is at high levels and causes restrictions on the purchasing power of consumers. It is to be expected that the increase in borrowing costs and the limitation of liquidity will lead to the postponement of investments and business initiatives, which as a result will slow down the economies. An important parameter is the maintenance of financial stability, since loan and investment portfolios may be negatively affected.

The Cypriot economy during the first quarter of 2023 continues to show resilience with the real estate, tourism and professional services sectors recording positive returns, while a good year is predicted for tourism. The shipping sector, despite the challenges, continues to contribute significantly to the GDP while the education and health sectors are strengthened. The establishment of foreign companies in Cyprus has multiple benefits for the country.

The strengthening of reforms, green transition, simplification of procedures in government departments through the implementation of e-government initiatives are major priorities for maintaining the country's competitiveness and enhancing the quality of services offered to citizens, as it is particularly important to maintain social cohesion.

Equally important is the assessment of conditions in the global economy, with estimates pointing to an increase in recessionary pressures in the second half of the year."