Geopolitical uncertainty and high inflation take their toll on the global economy

• Market volatility and investors’ concerns could see tighter global financial conditions
• Depreciating currencies and rising borrowing costs have exposed vulnerabilities and increased the risk of contagion.
• KPMG forecasts GDP growth of 1.9 percent and inflation at 4.7 percent in 2023 for the global economy

Growing geopolitical uncertainty and inflationary pressures are set to take their toll on global economic growth projections, according to the latest KPMG Global Economic Outlook.

The global organization is forecasting GDP growth of 1.9 percent in 2023, down from 2.7 percent in 2022, as the world grapples with a multitude of economic and political challenges. Weaker growth could see inflation moderate to 4.7 percent in 2023 after averaging 7.6 percent in 2022.

The report warns an acceleration in inflation is putting pressure on households’ finances and businesses’ margins, while leading central banks to tighten monetary policy aggressively, with recession once again on the horizon in many economies.

Rising costs are taking their toll on consumers, with a cost-of-living crisis putting a significant dent on households’ purchasing power. Consumer confidence has taken a big knock across most economies and spending are following suit, causing overall economic growth to weaken.

Energy uncertainty driven by conflict in Ukraine Although inflationary pressures were already present as economies reopened from Covid, the invasion of Ukraine by Russia added an extra strain, with a range of commodities exported by the region seeing their price rise significantly. More recently, some prices have moderated somewhat and supplies have adjusted while demand is easing as the economy slows.

Energy prices have been at the centre of the inflationary surge, although oil prices have moderated recently, which contributed to a minor ease in annual inflation figures in many countries recently. Nevertheless, the price of gas across many regions remains heavily impacted by the conflict in Ukraine, with the rush to secure shipments of liquefied natural gas (LNG) for winter causing not just European but also Asian gas prices to spike recently. It is still uncertain whether sufficient gas supply will be forthcoming over the winter months. This could prove a significant blow to the short-term outlook of some European economies which are more reliant on Russian supply.

The combination of supply chain bottlenecks, generous government spending, tight labor markets and a commodity shock triggered by the Russian invasion of Ukraine, have together caused inflation to shoot well above central banks’ target across many developed economies.

KPMG’s Global Economic Outlook expects inflation to moderate significantly from the middle of next year, as the energy shock is no longer reflected in the year-on-year inflation calculation. However, the world could be entering an environment that is structurally more inflationary, as production costs - from materials to energy and labor - remain elevated.

Faced with inflation well above target, an immediate concern for most central banks is that inflation expectations stay high, while their credibility in fighting inflation is lost. That is why central banks are likely to be more hawkish in their response to what could be a relatively short-lived burst in inflation, with markets pencilling in aggressive rate rises over the coming months. Moreover, if inflationary pressures are to become embedded, interest rates may stay at higher levels than what we saw in the past decade even after the current spike in inflation subsides. This would represent a significant shift in monetary policy in a relatively short space of time.

With the easing of Covid restrictions across the majority of the world, there was cautious optimism of an international post-pandemic bounce, but KPMG’s analysis reveals economic recovery was uneven and relatively short-lived before new challenges including supply-chain issues and subsequently the war in Ukraine began.

There are also fears a potential spike in cases during the Northern Hemisphere’s winter months could see a return to some restrictions, causing more disruptions to production and economic output – particularly in China, which continues to implement a zero-Covid policy. A rise in cases could also see a tighter labor market and increased pressure on health services, as well as additional burden on public finances.

To access the full report, visit: home.kpmg/globaleconomicoutlook

Brian O’Neill, Senior Manager, Global External Communications
T: +44 7823 668689
E: Brian.O’Neill@kpmg.co.uk

KPMG’s Global Economic Outlook provides bi-annual economic forecasts, produced by macroeconomics teams across KPMG’s global network using a suite of external and in-house models capturing the main inter-relationships in the world economy. As with all forecasts, these are subject to considerable uncertainty and the outturn may differ significantly.

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