KPMG Global Economic Outlook H1 2023

While our Crown Dependency islands are not feeling the full impact of international economic instability – largely due to the primary source of local government subsidies – we nonetheless face similar challenges to that of the UK and other jurisdictions.

Rising inflation and interest rates – coupled with increasing demand for local housing – serves to diminish consumer confidence and household spending in our islands. This combined with skills shortages and an overall ageing population continue to cast concern over public finances and are a drag on economic growth – splitting opinion among local politicians over how best to address budget deficits.

Still, the likelihood of the UK falling into recession has fallen thanks to a more resilient than expected Q4 2022. With our island economies so closely tied to that of the UK’s, we expect to see continued positive momentum after the turbulence of the last 3 years.

• 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 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. 

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.